P/E, P/B, and P/S: Three Valuation Tools That Measure Different Things
P/E, P/B, and P/S all ask the same basic question: the price you pay is high or low relative to what?
The difference is the denominator.
P/E looks at earnings, P/B looks at book value, and P/S looks at revenue. They are not measuring the same thing.
P/E: price paid for one dollar of earnings
P/E is the price-to-earnings ratio.
A simple version:
- A company’s share price is 20.
- Earnings per share are 1.
- The P/E ratio is 20.
That means the market is paying 20 units of price for each unit of annual earnings.
P/E works best for companies that are already profitable and whose earnings are relatively stable.
If a company is losing money, P/E breaks down. If earnings are cyclical, unusually high, or unusually low, P/E can also mislead.
P/B: price paid for one dollar of book value
P/B is the price-to-book ratio.
It compares market value with accounting book value.
Suppose a juice shop has 5 million in net assets and 1 million shares. Book value per share is 5. If the share price is 20, P/B is 4.
P/B can be more useful for asset-heavy industries where book value has real meaning, such as banks, insurers, some real estate companies, and manufacturers.
But for asset-light companies, book value may understate brand, network effects, software, talent, and customer relationships.
P/S: price paid for one dollar of revenue
P/S is the price-to-sales ratio.
It compares market price with sales revenue.
If a company has revenue per share of 10 and a share price of 20, its P/S is 2.
P/S is often used when profits are unstable, a company is expanding, or earnings are not yet positive.
But it has a major problem: revenue is not profit.
Two companies can have the same revenue while one has high margins and low expenses, and the other has low margins and heavy cash burn. The same P/S can mean very different things.
Do not treat ratios as answers
None of the three ratios is a universal ruler.
A better use is:
- Compare within the same industry, not across unrelated sectors.
- Compare with the company’s own history, not only one day’s value.
- Read the ratio alongside growth, margins, cash flow, and debt.
- Ask whether the denominator is reliable.
Valuation ratios are not buy or sell buttons. They are prompts for better questions: why is it expensive, why is it cheap, and where is the risk?
One sentence to remember
P/E asks whether earnings are expensive. P/B asks whether assets are expensive. P/S asks whether revenue is expensive.
The real judgment is not in one number, but in the quality of the business behind it.