Question

How do you calculate benchmark P/S? Example would be great! Thank you.

Answer 1

When we look at ratio and tries to compare it with the other company in the similar industry then the most appropriate way is taking the average of the industry and then use it as a benchmark to compare.

Let’s say here you want to create price/sales benchmark to compare, now if you compare one company price to sales with another company price to sales ratio it might not give you much information but lets say there are four companies, A, B, C and D in a particular industry and their price to sales ratio is 1.25, 2, 2.5 and 4 respectively for these four companies.

Take the average of these

(1.25 + 2 + 2.5 + 4)/4 = 2.44

Now you can use 2.44 as a benchmark price to sales ratio.