What is the main purpose of the Price-Sales ratio?

The main purpose of the Price-Sales (P/S) ratio is to assess how well a company generates revenue relative to its price. This ratio provides insight into how much investors are willing to pay for each dollar of sales that a company generates, thereby indicating the market’s valuation of the company’s sales performance.

A low P/S ratio may suggest that the stock is undervalued relative to its sales, while a high P/S might indicate overvaluation or strong growth expectations in the future. This metric is particularly useful for evaluating companies that are not yet profitable, as it focuses on sales rather than earnings, offering a different perspective on valuation compared to metrics that consider profitability.

In contrast, other answer choices pertain to different financial metrics or aspects of a company's financial health. Assessing total assets against liabilities relates more to the company's solvency and balance sheet strength. Determining profitability specifically involves metrics such as net income or operating margin rather than sales. Lastly, comparing book value to market value typically involves the Price-to-Book (P/B) ratio, which focuses on asset valuation rather than sales performance. Thus, the P/S ratio's unique focus on revenue generation in relation to stock price makes the first choice the correct answer.