When it comes to the price of a stock, the number one question is whether or not it is a good deal. The price/sales ratio is vital in determining if the market has undervalued or overvalued the price of a stock.

You need to know various things about a stock before you invest in it. Does the stock have room to grow? Is it moderately priced when compared to its industry associates? Are there solid growth prospects, not just gut-feelings?

A stock may have these factors, but still be overpriced. That doesn't mean you should completely rule it out. Just keep it in mind for when the price goes down to a more attractive level.

You can use the price/sales ratio of a stock to make an informed investment decision. The price of the stock actually tells you very little. You can't just look at a price and know whether or not it is a good buy. You have to have background on the stocks you are considering. Only then can you accurately compare different stocks for purchase.

This ratio allows you to evenly compare companies. You simply divide the market capitalization, or outstanding shares times the price per share, of the company by its revenue. For example, a company may have 100 million outstanding shares. The price per share is $55, making the market cap $5.5 million. You then divide the $5.5 million by the company's revenue.

When you divide the market cap by the revenue, the ratio that results will help you compare different companies. The lower the ratio number, the better the investment is. However, the ratio is only truly effective when comparing companies in the same industry.

Say you are looking at two tech companies. One has a ratio of 1.8 and the other has a ratio of 3.2. The entire industry group has a ratio of 3.3. Both stocks have a better ratio than the industry average. But the first stock is a better value.

Keep in mind that there are other factors to consider as well. The price/sales ratio and the price/earnings ratios could contradict each other -- this isn't a good sign. You should also be wary of one-time events that affect the company temporarily. Most reports will include the price/sales ratio and the price/earnings ratio for you.

Remember, you have to pick the right companies and then compare their price/sales ratios. This will help you in determining whether or not a stock is a good deal.