Entrepreneurs always ask, "What's the value of my company?" And I usually respond to that question by saying, "Maybe the correct question to ask is, 'What's the value of your company to our investors?'" And that answer is not as straight forward as it seems, because a lot of the entrepreneurs that we deal with here at the Capital Match Point are emerging growth industries, and one of the most common methods of determining the value of a company is a price-to-earnings ratio. Well, in emerging growth industries, the market is usually not defined enough such that there is an earnings history that you can go back and make a real price-to-earnings estimate for companies in that market space. So, a surrogate the investors sometimes use is the ratio called the price-to-sales ratio. Price to sales is very similar in its calculations to price to earnings. Let's take Company A for example. Let's say that Company A's stock price is $20, and let's say that the most recent 12 month period, Company A had sales of $20 per share. Company A's price-to-sales ratio is one. Now, an investor's going to take this information, look back, and, instead of going out and digging up price-to-earnings information on companies in your market space, they're going to look at price to sales, and they're going to use this as an indicator of value of your company, which is ultimately the indicator of what they're going to be willing to accept in terms of equity in exchange for a cash infusion in your company.
It's important to an entrepreneur to understand what their price-to-sales ratio is, again, especially if they're in an emerging growth industry, because they want to be as well prepared as possible when the time for negotiation comes.

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