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Use P/E when a company has positive, reasonably representative earnings; use P/S as a supporting comparison when earnings are negative, very small, or temporarily distorted. P/E compares a share price with earnings per share, while P/S compares a company’s market value with its sales. Neither ratio says by itself whether a stock is cheap: P/S does not show whether sales are profitable, and P/E can mislead when earnings are unusual. The useful choice depends on the company’s earnings, business model, and the question you are trying to answer.
What do P/E and P/S measure?
P/E and P/S are valuation multiples: each relates a company’s market price to a financial measure, but the measures are different. P/E relates price to profit attributable to shareholders; P/S relates market capitalization to revenue. Because profit is what remains after costs, P/E carries information about profitability that P/S does not.
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The Investor.gov definition of P/E is share price divided by earnings per share (EPS). Its description of current EPS uses earnings over the past 12 months divided by common shares outstanding. P/S is commonly calculated as market capitalization divided by annual sales or revenue. The SEC-hosted filing discussing the multiple describes it as market value of equity divided by annual sales or revenue.
Formula and meaning
- P/E = share price ÷ earnings per share. It indicates how much market price corresponds to each dollar of earnings per share for the period used.
- P/S = market capitalization ÷ annual sales. It indicates how much market value corresponds to each dollar of revenue for the period used.
The whole-company P/S formula is equivalent to share price divided by sales per share only when the share counts and periods are aligned. Do not divide a per-share price by a company-wide revenue figure, or combine mismatched reporting periods. For either multiple, identify whether the denominator is trailing or forecast and apply the same basis consistently to comparable companies.
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Which multiple should you use?
Start with the company’s earnings. If they are positive and reasonably representative of ongoing operations, P/E is usually the more useful of these two multiples because it connects price to profit. If earnings are negative, tiny, or distorted by unusual items, P/E may be uninformative; P/S can still provide a revenue-based comparison, but it must be supplemented with an assessment of profitability and financial risk.
| Company’s situation | More useful starting point | What to check next |
|---|---|---|
| Positive, reasonably representative earnings | P/E | Whether earnings are recurring, and how the P/E compares with similar peers and the company’s history |
| Negative earnings | P/S as a supporting lens | Margins, growth, debt, cash flow, and whether the business can convert sales into profit |
| Very small or unusually affected earnings | P/S may offer a steadier revenue comparison | Why earnings are small or unusual; whether the revenue figure is comparable and sustainable |
This is a conditional choice, not a rule that one ratio is always superior. P/E’s advantage is that it uses earnings rather than sales; its weakness is that the earnings denominator can be negative or unrepresentative. P/S can be applied where earnings are not positive, but it leaves the central question of profitability unanswered.
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Can you use P/E for an unprofitable company?
You can calculate a P/E when EPS is negative, but the resulting negative ratio is not a conventional signal that the stock is cheap. The denominator is a loss, so ordinary interpretations of a positive P/E do not apply. In this situation, treat P/E as not meaningful for a standard price-to-earnings comparison rather than ranking a negative value against positive peer multiples.
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For a company without positive earnings, P/S can help compare market value with revenue. The SEC archive includes a 2013 comment letter whose authors chose P/S for a particular analysis because their sample included growth stocks with little or no earnings. That explains the choice for that sample; it is not a universal endorsement of P/S or evidence that revenue alone establishes value.
What does P/S miss?
P/S cannot distinguish revenue that produces substantial profit from revenue earned at a thin margin or at a loss. Two companies with similar P/S multiples may have very different gross and operating margins, cost structures, debt, growth prospects, and ability to turn sales into cash.
That is why a lower P/S is not automatically better. It may warrant investigation, but it does not establish that the company is undervalued. Compare margins and cash flow, examine debt and other risks, and consider whether revenue growth is sustainable before drawing a conclusion. The same caution applies to P/E: a low multiple is a clue to investigate, not a buy signal.
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How do you compare the multiples fairly?
Compare companies with similar business models and industry economics, and use consistent reporting periods and denominator definitions. The SEC’s Beginners’ Guide to Financial Statements notes, “As a general rule, desirable ratios vary by industry.” A multiple that looks high or low without industry context may tell you little.
- Choose relevant peers. Look for companies with comparable business models and economics, not merely companies with similar names or broad sector labels.
- Match the periods. Compare trailing earnings with trailing earnings or forecast earnings with forecast earnings; apply the same principle to revenue. State which basis you are using.
- Check earnings quality. Ask whether reported profit appears recurring or is materially affected by one-time items. If it is not representative, be cautious about using P/E.
- Examine revenue and margins. Check whether growth is sustainable and whether gross and operating margins support the story suggested by sales. This is especially important when using P/S.
- Look beyond the multiple. Review debt, cash flow, and other risks the chosen ratio does not capture.
- Use more than one comparison. Consider relevant peers and the company’s own history. Historical or peer comparisons are valuation tools, not guarantees of future performance.
How can you calculate each multiple?
Use the same price date and consistent financial periods when comparing companies. The numbers below are hypothetical examples to show the arithmetic, not market data or valuation benchmarks.
Illustrative P/E calculation
Suppose a share costs $30 and the company reports $2 of EPS for the chosen period. P/E = $30 ÷ $2 = 15. The result is 15 times earnings for that period. Before comparing it with another company, check that both EPS figures use the same trailing or forecast basis and that earnings are reasonably representative.
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Illustrative P/S calculation
Suppose a company has a market capitalization of $600 million and annual revenue of $300 million. P/S = $600 million ÷ $300 million = 2. The result is 2 times annual sales. It does not mean the company earns $2 of profit for every dollar of sales; it means market value is twice the revenue figure used. To understand what the multiple implies about the business, examine profitability, growth, debt, and cash flow.
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What is the practical takeaway?
Use P/E as the primary lens when earnings are positive and representative. When they are not, P/S may help you compare a company with similar peers on a revenue basis, but pair it with margin, growth, debt, and cash-flow analysis. In either case, treat the multiple as one piece of evidence—not a standalone estimate of intrinsic value or a decision to buy or sell.
For a broader technical reference, Wiley lists the fourth edition of Aswath Damodaran’s Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. It is an advanced valuation reference, not a prerequisite for understanding these two ratios.
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Frequently Asked Questions
Does a lower P/S mean a stock is cheap?
No. A lower multiple could reflect weaker prospects or risks, and P/S does not reveal whether revenue is profitable. Compare margins, growth, debt, and cash flow before interpreting the difference.
Should I compare a company’s P/E with the whole market?
A broad market comparison can miss important differences in industry economics. Start with peers that have similar business models, then consider the company’s own history and the consistency of the earnings periods.
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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errorsCan I compare trailing P/E with forward P/E?
They use different earnings periods, so the figures are not directly like-for-like. If you compare them, label each basis clearly and avoid treating the difference alone as proof of a valuation change.
Does P/S use profit after expenses?
No. Its denominator is sales or revenue, not profit. Expenses and the resulting margins have to be considered separately.
