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ACE Ltd P/S Ratio: 1.7 ( as of Today)

* All numbers are in millions except for per share data ACE 10-Y Financials »

Definition

The P/S Ratio is another ratio widely used to value stocks. It was first used by Ken Fisher. It is calculated as:

P/S Ratio = Share Price / Revenue per Share

It can also be calculated from the numbers for the whole company:

P/S Ratio = Market Cap / Revenue

The revenue here is for the trailing 12 months.

Formula

P/S Ratio = Market Cap / Revenue

ACE Ltd ps Calculation

* All numbers are in millions except for per share data

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Explanation

The P/S ratio is an excellent valuation indicator if you want to compare a stock with its historical valuation or with the stocks in the same industry. The P/S ratio works especially well when you want to compare the stocks current valuation with its historical valuation. The P/S ratio is a great valuation tool for evaluating cyclical businesses where the P/E ratio works poorly. It works the best when comparing the current valuation with the historical valuation because over time, a companys profit margin tends to revert to the mean.

When the P/S ratio is applied to the whole stock market, it can be used to evaluate the current market valuation and projected returns. In this case, the price is the total market cap of all stocks that are traded, and sales are the GDP of the country. This is how Warren Buffett estimates the broad market valuation and project future returns.

Similar to the Price/Earnings ratio and Price/Cash Flow or Price/Free Cash Flow, the P/E ratio measures the valuation based on the earning power of the company. This is where it is different from Price/Book ratio, which measures the valuation based on the companys balance sheet.

Beaware

The P/S ratio does not tell you how cheap or expensive the stock is. It cannot be used to compare companies in different industries. It works better for companies within the same industry because these companies tend to have similar capital structures and profit margins. It works the best when comparing a company with itself in the past.

Related Terms

Market Cap, Revenue, Median P/S Value, P/E Ratio, P/B Ratio
* All numbers are in millions except for per share data

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Dec10Mar11Jun11Sep11Dec11Mar12Jun12Sep12Dec12Mar13
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