Price-to-sales (P/S) ratio for the S&P 500 Index
The Price-to-sales ratio can be calculated for a single stock of for an index. It calculated dividing the current market value by the revenues (sales) of the last 12 months. High P/S ratios indicate an overvaluation of the market, low P/S ratios a bear market. This notion has not changed, but the values of the ratio have increased in the last years. In the 50’s crisis at the market peak the P/S was 1.08 in 1956 and at the market low it was 0.89 in 1957. In the 50’s crisis at the market peak the P/S was 2.44 in 2000 and at the market low it was 1.31 in 2003. However, it came back to about 1.6 on 2007 and then fell to 0.8 in 2009. Therefore, the P/S has always to be seen in the context.
- P/S Ratio can be calculated for single stocks and for indices
- Price of the company on the market divided by revenue of the last 12 months
- Regular between 1-2, Above 2: high, below 1: low, this is strongly depending on history and context and cannot be applied universally
Table of Contents
The theory behind the price to sales ratio
Price-Earnings-Ratios are a common indicator for stocks and markets. However, they can be poor valuation indicators in periods where profits decrease. For example in 1991, the P/E ratio reached 20 because profits sunk. However, stocks were entering a new bull market. In October 2002, at the low dot-com bubble, PE ratios were above 30, anyways it was the moment to buy as the bear market reached its bottom. This is what we already saw in our previous article about the P/E ratio
Also, the P/E ratio can be influenced by companies cutting costs and going for short term profitability and returns, especially through increased margins. Therefore, the Price-to-Sales ratio is an indicator that can give additional information when the P/E is not working.
How to use the price to sales ratio
Just as P/E ratios, P/S ratios had different values at peaks and bottoms of the market. Looking at the table below, you can see the major peaks and bottoms of the S&P500 since 1955. As we can see, there is no clear pattern of a fixed number that indicates a high or a low. Rather the context has to be seen. Markets in 1981 peaked at a P/S ratio 0.52 and they bottomed at 0.54 in 1973. On the other hand, markets peaked at 1.37 in 1961 and bottomed at 1.31 in 2003.
|Date Peak||Date Trough||P/S at S&P 500 Peak||P/S at S&P 500 Trough|
|April 6, 1956||October 25, 1960||1.02||0.89|
|January 8, 1960||October 28, 1960||1.18||1.06|
|December 15, 1961||June 29, 1962||1.37||1.02|
|February 11, 1966||October 7, 1966||1.32||1.00|
|December 6, 1968||May 29, 1970||1.27||0.83|
|April 30, 1971||November 26, 1971||1.10||0.96|
|January 1, 1973||December 6,1974||1.11||0.54|
|September 24, 1976||March 3, 1978||0.67||0.49|
|September 8, 1978||April 25, 1980||0.60||0.49|
|May 1, 1981||August 13, 1982||0.52||0.40|
|December 2, 1983||July 27, 1984||0.62||0.56|
|August 28, 1987||October 23 1987||0.99||0.74|
|July 20, 1990||October 12, 1990||0.85||0.72|
|July 17, 1998||August 4, 1998||2.04||1.67|
|March 24, 2000||March 14, 2003||2.44||1.31|
The level of the P/S is also depending on the general profitability of the market. If the market is highly profitable, a higher P/S ratio makes sense. This becomes especially clear, when we look at single stocks of highly profitable companies, they can be over 4 and well priced. Stocks of companies with little profitability can have a P/S of as low as 0.25 which might be a correct market pricing. The following graph shows the P/S ratio of the last two crises (dot com bubble 2000-2002, housing bubble 2007-2009) where we see higher P/S ratios than in the past.