If you’re trying to separate undervalued from overvalued companies, comparing market value (the company’s worth) to revenue (the amount of money a business earns before deducting expenses) can be a useful starting point. It is referred to as the price to sales or PS ratio for short.
The PS ratio is straightforward to calculate; for example, Sainsbury’s reported sales of £33.6 billion in 2026 and it has a market value of £6.9 billion, which means it trades on a PS ratio of 6.9/33.6, or 0.2 times.
It is useful for assessing companies which are unprofitable, where a traditional PE (price to earnings) ratio would be meaningless. Sales are harder to manipulate than accounting metrics like profits.
With the caveat that single valuation metrics should never be used in isolation and without context, let’s dive into the pros and cons of the PS ratio.
Does price to sales work?
Investor Jim O’Shaughnessy tested US stocks from 1951 to 2003 and found that buying stocks with the lowest price to sales ratio generated more than a 17% compound annual return. By contrast, stocks with the highest ratios produced an annualised return of only 3%.
What is going on?
A low PS ratio typically means investors are pricing in a combination of low operating margins, low growth or high risk, while high PS implies high margins, growth and low risk.
For most industries, margins move up and down through the business cycle. A low PS ratio can indicate the market does not believe low margins will recover, while also believing high margins will continue indefinitely.
In short, investors overpay for glamourous exciting growth narratives while abandoning unglamorous troubled areas of the stock market.
Are there any drawbacks?
The PS ratio ignores debt which can explain why some companies trade on low PS ratios, as investors apply a discount to account for higher financial risk.
Margins vary quite a bit across different industries which makes it difficult to compare a software company like Sage, which has margins around 20%, with a grocer like Sainsbury’s, which has a wafer thin 2.8% margin.
How to create an apples-to-apples comparison
However, we can tweak the data which neutralises the margin differences between companies operating in different industries.
For example, Jet2 looks around twice as expensive as Currys based on the raw PS data (0.36 versus 0.19). But then, Jet2’s operating margin is almost twice as large as Currys (4.02% versus 2.35%).
It’s understandable why investors would pay more per unit of sales for Jet2, because they are almost twice as profitable. The table shows companies trading at low PS ratios adjusted for their respective margins. We have removed companies with excessive debts.
Finally, as a common-sense check we have included a column showing free cash flow yield (free cash flow divided by market value). It is worth repeating that an investment screen is only the starting point for investigating investment opportunities.
Tesco – maintains guidance
The UK’s biggest food retailer maintained its annual profit guidance on 18 June despite like-for-like sales growth coming in slightly below analysts’ estimates for the 13-weeks to the end of May.
Chief executive Ken Murphy dismissed any concerns, saying the group faced a tough prior year comparative when the weather was ‘outstanding’ and sales growth was truly ‘exceptional.’
Tesco expects full year adjusted operating profit of between £3 billion and £3.3 billion and free cash flow of between £1.5 billion and £2 billion.
Currys – showing resilience
The electricals retailer has defied the consumer slowdown and continues to gain market share in the UK driven by strong growth in its mobile network unit.
Currys raised its profit outlook above the prior range of £180 million to £190 million in May and said it plans to continue returning capital to shareholders. The board recently appointed its Nordics chief executive Frednik Tonnesen as group CEO, replacing Alex Baldock.
WPP – simplifying the business
Advertising group WPP operates in a very cyclical industry, and margins are currently depressed. The company is planning to combine its agencies into a single unit under new CEO Cindy Rose in a turnaround plan aimed at simplifying the business and returning to growth, while making £500 million of annual cost savings. The shares recently traded at multi-decade lows and WPP exited the FTSE 100 in December 2025.
JD Wetherspoon – last man standing
Scale and value are core strengths of pub group Wetherspoon, which continues to outperform the hospitality industry. The company, headed by Tim Martin, reported a 3.2% increase in like-for-like sales in February, marking the 42nd consecutive month of growth ahead of the market.
The company resumed dividends in 2025 and initiated a share buyback programme which has continued into 2026.
Hays – slimming down
The recruitment has been under pressure in Europe, which is a key market for Hays. This has led to depressed operating margins amid one of the longest hiring downturns on record.
After completing the sale of its Czech Republic, Denmark, Hungary, Luxembourg, Romania, and Sweden businesses to private equity firm Meraki Capital for £4 million, Hays is exploring options for several other countries.
Long-serving CEO Dirk Hahn stepped down in the first half of fiscal 2026 and was replaced by chief technology officer Mark Dearnley. Productivity improvements are becoming visible as the company executes its cost cutting plans.
Hays continues to generate net cash from operations and ended the third quarter with net cash of £40 million on the balance sheet. In early June the company increased its share buyback to £10 million.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
