Price-to-Sales, Price-to-Book, and Price-to-Cash Flow Ratios

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To calculate the price-to-sales ratio, divide the market price of a common stock by its sales-per share figure. The equation for the price-to-sales ratio is as follows:

Price-to-sales ratio = [P0 / sales per share].

Incorporating the given information into this equation will yield the following: Price-to-sales ratio = [$41.32 / ($25,000,000 / 1,750,000)] = 2.8924

The calculation of the price-to-book ratio involves dividing the market price of a common stock by its net worth per share. The equation for the price-to-book ratio is as follows:

Price-to-book ratio = [P0 / net worth per share].

Where: net worth per share = (total assets - total liabilities) / # of common shares outstanding.

In this example, the net worth figure has been converted to a per-share basis, and the calculation of the price-to-book ratio is straightforward:

Price-to-book ratio = ($41.32 / $12.97) = 3.18581

The calculation of the price-to-cash flow ratio involves dividing the market price of a common stock by the cash-flow-per-share figure. The calculation of the price- to-cash flow ratio is as follows:

Price-to-cash flow = (P0 / cash flow per share)

In this example, the cash flow figure must be converted to a per-share basis, as follows: Cash-flow-per-share = ($8,750,000 / 1,750,000) = $5.00

Now that the cash-flow-per-share has been determined, the price-to-cash-flow ratio can be calculated. Incorporating the given information into this equation will yield the following:

Price-to-cash flow = [$41.32 / $5} = 8.264