Market capitalisation divided by annual revenue — a valuation multiple useful for companies with no earnings, or when earnings are temporarily depressed.
Deeper Explanation
P/S is most useful when: (1) earnings are temporarily negative due to investment cycles, (2) comparing companies in the same industry with different margin profiles, or (3) valuing early-stage growth companies where profitability is still developing. Lynch observed that P/S ratios below 0.5× are a consistent early-stage value signal — he found many of his multi-baggers when the stock traded at low single-digit P/S multiples. The limitation: P/S ignores profitability entirely. A 2× P/S is cheap for a 25%-margin business but expensive for a 3%-margin business — margins must always be incorporated into any P/S-based assessment.
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