Are you ready to learn about the most exciting thing in the financial world? Of course, I’m talking about the Price to Sales Ratio (PSR)! You might be thinking, “Wow, how can I contain my excitement?” But don’t worry, I’m here to guide you through this journey.
Table of Contents
PSR Calculation Formula
The PSR is calculated by dividing the market capitalization of a company by its annual revenue. Don’t get scared by the formula, it’s quite simple. Here it is in code format:
PSR = Market Capitalization / Annual Revenue
Categories of PSR Calculations
Let’s break down the different categories of PSR calculations and their interpretation:
Category | PSR Range | Interpretation |
---|---|---|
High PSR | > 5 | The stock may be overvalued |
Moderate PSR | 1 – 5 | The stock is reasonably valued |
Low PSR | < 1 | The stock may be undervalued |
Examples of PSR Calculations
Let’s see some examples of PSR calculations for different individuals:
Name | Market Cap ($m) | Annual Revenue ($m) | PSR Calculation |
---|---|---|---|
Elon Musk | 600,000 | 30,000 | 20 |
Jeff Bezos | 1,500,000 | 380,000 | 3.94 |
Warren Buffet | 500,000 | 250,000 | 2 |
As you can see, Elon Musk’s company has the highest PSR, which means it may be overvalued.
Different Ways to Calculate PSR
There are different ways to calculate PSR, here are some of them:
Method | Advantages | Disadvantages | Accuracy Level |
---|---|---|---|
Trailing Twelve Months | Uses most recent data | Doesn’t account for seasonality | Moderate |
Forward Twelve Months | Accounts for expected future revenue | Can be less accurate than trailing twelve | Moderate |
Quarterly | More recent data than annual | Doesn’t account for seasonality | Low |
Rolling Four Quarters | Accounts for seasonality | Can be less accurate than annual | High |
Evolution of PSR Calculation
The PSR calculation has evolved over time, here’s a brief overview:
Time Period | PSR Calculation |
---|---|
1920s | Created by Benjamin Graham |
1960s | Became widely used in the financial industry |
2000s | Widely used for tech startups |
Limitations of PSR Calculation Accuracy
It’s important to acknowledge the limitations of PSR calculation accuracy. Here are some of them:
- Historical Data: PSR is based on past performance, which may not predict future performance.
- Industry Differences: Different industries have different PSR ranges, so it’s important to compare companies within the same industry.
- Accounting Methods: Some companies may use different accounting methods, which can affect the PSR calculation.
Alternative Methods for Measuring PSR
There are alternative methods for measuring PSR, here are some of them:
Method | Pros | Cons |
---|---|---|
Price to Earnings | Widely used in the financial industry | Doesn’t account for revenue growth |
Price to Book | Accounts for book value of assets | Doesn’t account for revenue growth |
Enterprise Value | Accounts for debt and cash balances | Can be more complex than PSR |
PSR Calculator FAQs
- What is a good PSR? A moderate PSR, between 1 and 5, is considered good.
- Is a high PSR good or bad? A high PSR, above 5, may indicate that the stock is overvalued.
- What is the difference between PSR and P/E ratio? PSR measures a company’s market value relative to its revenue, while P/E ratio measures a company’s market value relative to its earnings.
- What is a low PSR? A low PSR, below 1, may indicate that the stock is undervalued.
- What is the formula for PSR? PSR = Market Capitalization / Annual Revenue.
- What is the PSR for Amazon? Amazon’s PSR is currently around 4.25.
- What is the PSR for Tesla? Tesla’s PSR is currently around 20.
- How often should I recalculate PSR? PSR should be recalculated regularly, at least once a year.
- What industries have high PSR? Technology and healthcare industries are known to have higher PSR ranges.
- What is the PSR for Apple? Apple’s PSR is currently around 7.
Resources for PSR Calculations
Here are some reliable government and educational resources for further research:
- Investopedia: Provides a detailed explanation of PSR and its calculation.
- SEC EDGAR: Allows you to search for a company’s financial statements, including revenue and market capitalization.
- Harvard Business Review: Provides an in-depth analysis of PSR and its usefulness in investment decisions.