Despite several advantages, the P/S ratio has some limitations. One major flaw is that sales may be worth a little or a lot, depending on a company's profitability. If a company is posting billions in sales, but it is losing money on every transaction, we would have a hard time pinning an appropriate P/S ratio on the shares because we have no idea what level of profits (if any) the company will generate.
We will reiterate that when using the P/S ratio, it is important to keep in mind that a dollar of earnings has the same value regardless of the level of sales needed to create that dollar. A dollar of sales at a highly profitable firm is therefore worth more than a dollar of sales for a company with a narrower profit margin. Thus, the P/S ratio is generally useful only when comparing firms within an industry or industries with similar profitability levels, or when looking at a single firm over time.
Price/Book (P/B) >>