Valuing a stock with no profit: the price to sales ratio
2026-09-10 · By Lubin Danilo, founder of Lubin Investment
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Price to sales divides a company's market value by its annual revenue. It stays computable even without positive earnings or free cash flow, unlike price to earnings or price to free cash flow. That is why it appeals to young, fast growing companies, and also why I trust it less than the other two.
The only multiple that survives without profit or cash
Two ratios show up constantly in my analysis: price to earnings, and especially price to free cash flow, the one my site relies on and that I explain in detail in this article. Both share an awkward flaw: they need a positive number to exist. Price to earnings divides the share price by net income; once that turns negative, the ratio stops meaning anything. Price to free cash flow divides the price by the cash a company generates once its bills are paid; without positive cash, same problem.
There is a third ratio, less precise but almost always computable: price to sales. It simply divides a company's total market value by its annual revenue. A company that still sells something almost never has negative revenue, which makes it the one multiple that holds up when the other two collapse. My own tool shows the problem very concretely on Rivian's page, the American electric vehicle maker: my price to free cash flow field reads not computable, with this explanation built directly into my data: negative or zero free cash flow over the trailing twelve months.
Rivian still passes 5 of my 10 quality criteria, with revenue growing 24.3% a year, but a net margin of -54.9% that makes price to earnings equally useless. Rivian reported $1.658 billion in second quarter 2026 revenue, up 27% year over year, driven by the mid-June launch of its R2 model, and its first positive quarterly gross profit of $179 million, figures consolidated in its quarterly filing with the SEC. Annualizing the revenue per employee my model returns ($353,663 per employee, across 15,232 employees), I get roughly $5.4 billion in trailing twelve month revenue, against a total market value of $23.2 billion. The price to sales ratio comes out around 4.3 times, a number that neither price to earnings nor price to free cash flow can give me for this stock today.
| Multiple | What it needs to exist | What it ignores |
|---|---|---|
| Price to earnings | Positive net income | Accounting choices that inflate or compress that income |
| Price to free cash flow | Positive free cash flow over 12 months | Becomes non computable once generated cash turns negative, common among young, fast growing companies |
| Price to sales | Revenue, even with heavy losses | Whether that revenue will ever turn into profit or cash |
Why I distrust it more than the other two
The trouble with price to sales is that it says absolutely nothing about what happens between a sale and the cash register. A company can grow revenue very fast while destroying value for every existing shareholder. That is exactly what another of my criteria shows on Rivian: shares outstanding are growing 9.65% a year, a dilution rate that fails my ownership discipline criterion. In other words, part of that 24.3% annual revenue growth is funded by issuing new shares, which shrinks each existing shareholder's slice of the pie. A price to sales ratio that looks reasonable can therefore hide a much less flattering story once you think per share instead of in total value.
My rule, then: I only use price to sales as a last resort, for a young company whose earnings and free cash flow are not yet positive, never to compare mature companies against each other. And I never look at it alone: I immediately check the margin trajectory, it is widening at Rivian, revenue growing faster than costs, and the pace of dilution, because the real question is whether the company is getting closer to the day price to free cash flow becomes computable again, or further away. Aswath Damodaran has documented for decades why sales multiples are among the easiest to justify with a story rather than with numbers: for the same demand, the market pays more for revenue it believes will turn profitable tomorrow than for revenue that stays revenue forever. You can check the full page for any stock, including ones where price to free cash flow cannot be computed, on my analysis tool, and find my full valuation method in my complete methodology.
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Related reading
- The PEG ratio: can a high price be justified?
- How do you spot a value trap in the stock market?
- Why I never judge a bank like any other stock
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).