How to Value an IPO:
Using P/S Ratio for Loss-Making Companies

Why Traditional P/E Ratios Don't Work for IPOs

The price-to-earnings (P/E) ratio is the most common stock valuation metric. The formula is: share price ÷ earnings per share (EPS). It rests on one fundamental assumption: the company is profitable. But according to statistics, over 80% of tech companies listing in Hong Kong in recent years were still recording net losses at IPO — EPS is negative, and P/E cannot be computed.

Take Zhongke Wenge (01956.HK), slated to list on 26 June 2026: the company posted revenue of RMB 405 million in FY2025, up 27.5% year-on-year, with a gross margin of 51.2% — the business is expanding rapidly. Yet it still recorded a net loss of RMB 174 million. A P/E valuation would simply return "N/A" — but that doesn't mean the company has no value.

This is precisely where the P/S ratio (price-to-sales) comes into its own. It substitutes "revenue" for "earnings", making it applicable to all companies — profitable or not.

What Is the P/S Ratio? How Is It Calculated?

The P/S formula is straightforward:

The P/S ratio tells you: how many times revenue the market is willing to pay. A P/S of 10× means investors are paying HK$10 of market cap for every HK$1 of annual revenue the company generates.

Worked Example: Zhongke Wenge (01956.HK)

What P/S Is Reasonable? Peer Comparison Is Key

There is no "absolute standard" for P/S ratios — average levels vary enormously across sectors. The correct approach is to benchmark against listed peers in the same industry:

Zhongke Wenge's P/S of 24.1× sits notably above the 12–18× reference range for the AI sector. This suggests its IPO pricing carries a premium — investors are paying above the industry average for the company's revenue. That said, a higher P/S can also reflect market optimism about its 27.5% revenue growth and 51.2% gross margin. Valuation judgements require weighing multiple factors.

How to Derive a Fair Share Price

Once you have an industry P/S benchmark, you can work backwards to a fair price range:

The offer price of HK$60.70 vs a fair price of HK$37.7 represents a premium of ~61%. This provides a reference framework — but the final investment decision must also consider revenue growth rates, gross margin trends, and sector outlook.

Where to Find Key Numbers in the Prospectus

A typical prospectus runs 400–500 pages, but the key figures needed for valuation are concentrated in just a few locations. The table below lists each figure and its exact location:

Limitations of P/S Valuation

While P/S is the most suitable valuation tool for loss-making companies, it is not without flaws:

• •Ignores profitability: Two companies with identical revenue could earn the same P/S, yet one has a 60% gross margin and the other 20%. P/S does not reflect differences in profitability.
• •Ignores capital structure: A heavily indebted company is riskier than a debt-free one, but P/S does not reflect debt levels.
• •Industry benchmarks have limits: Business models among peers can differ significantly; simplistic P/S comparisons can be misleading.
• •Growth premium is hard to quantify: High-growth companies deserve a higher P/S, but there is no standard answer for what constitutes a "reasonable premium".

Best practice is to combine P/S with P/B (price-to-book), revenue growth, gross margin, and other metrics for a holistic assessment — do not rely on a single indicator.

Summary

For loss-making tech IPOs, the P/S ratio is the most practical valuation starting point. Three key steps:

1. Extract the offer price, total shares, and annual revenue from the prospectus
2. Compute the P/S ratio and benchmark against listed peers in the same industry
3. Use the industry's reasonable P/S range to derive a fair share price and assess whether the IPO is priced fairly

FinKit's IPO Valuation Calculator automates these steps — simply enter the stock code and the system pulls data from the IPO database and computes results instantly.