Chartered Financial Analyst (CFA) Level 1 Practice Exam

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Prepare for the CFA Level 1 Exam with comprehensive study guides. Access multiple choice questions and detailed explanations to enhance your readiness. Start your journey to become a Certified Financial Analyst today!

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How is the Price to Sales (P/S) ratio defined?

Price per share / Sales per share
Sales per share / Earnings per share
Price per share / Total debt
Price per share / Cash flow per share

The correct answer is: Price per share / Sales per share

The Price to Sales (P/S) ratio is defined as the ratio of a company's stock price per share to its sales revenue per share. This metric provides investors with an understanding of how much they are paying for each dollar of sales generated by the company. By using this ratio, investors can gauge the relative value of a stock, especially in situations where earnings may be negative or difficult to interpret. The numerator, price per share, reflects the current market valuation of the company, while the denominator, sales per share, captures the revenue generated by the company on a per-share basis. This relationship is particularly useful for comparing companies within the same industry, allowing investors to identify potentially undervalued stocks based on sales performance. Understanding this ratio can be valuable because it offers insights into the company's revenue generation efficiency and overall financial health, without the distortions that can arise from earnings calculations influenced by accounting practices.