Market cap relative to revenue — useful when a company doesn't have positive earnings yet.
The price-to-sales (P/S) ratio is market cap divided by revenue. Because revenue is rarely negative (unlike net income), it's a fallback way to size up a company that isn't profitable yet, or one going through a temporary earnings dip.
P/S = market cap ÷ revenue. No adjustment for margins or debt, which is exactly its weakness — two companies with identical revenue can have wildly different real value if one converts that revenue into profit far better than the other.
Lower is generally cheaper relative to sales, but P/S is most useful as a first-pass screen, not a final answer — always check it against operating margin, since a low P/S on a business that can't turn revenue into profit isn't actually cheap.
Comparing P/S across industries with very different margin structures (a grocery chain vs. a software company) is close to meaningless — a 2x P/S can be expensive for one and cheap for the other, because they convert that dollar of revenue into very different amounts of profit.
What is the P/E ratio? What is operating margin?
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