Price to sales vs price to book — what these ratios tell you.

The price to sales ratio (P/S) compares a company’s market capitalization to its total revenue over the trailing twelve months. It tells you how much investors are paying for each dollar of sales the company generates.

The formula is: P/S = market cap ÷ total revenue. If a company has a market cap of $10 billion and annual revenue of $5 billion, its P/S ratio is 2.0. Investors are paying $2 for every $1 of sales.

The P/S ratio is especially useful for companies that are not yet profitable. Since revenue is reported before any costs are subtracted, it cannot go negative — unlike earnings. This makes P/S one of the few valuation tools available for pre-profit growth companies and early stage businesses. It is also harder for companies to manipulate revenue than earnings, giving P/S a reliability advantage.

See how P/S fits into the bigger picture by reading the complete guide to how to read stock fundamentals.

The P/S ratio is most valuable in specific situations where other valuation metrics break down.

Pre-profit and high-growth companies

Many of the most successful growth companies trade at high P/E ratios — or have no P/E at all because they are not yet profitable. The P/S ratio lets you value them on revenue alone. This is common in technology, biotech, and high-growth consumer sectors.

Volatile or cyclical earnings

Companies with unpredictable earnings — due to commodity cycles, economic sensitivity, or one-time charges — can produce misleading P/E ratios. The P/S ratio smooths through these fluctuations since revenue is typically more stable than earnings.

Industry comparison

Within the same industry, P/S ratios can be compared to identify outliers. Browse companies and their P/S ratios on the US stocks page to see how different industries stack up.

The price to book ratio (P/B) compares a company’s market capitalization to its book value — the value of its assets minus its liabilities as recorded on the balance sheet.

The formula is: P/B = market cap ÷ book value. Book value per share tells you what each share would theoretically be worth if the company were liquidated and all assets were sold at their recorded value. If a stock trades at $50 per share and has a book value per share of $25, its P/B ratio is 2.0.

The P/B ratio has deep roots in value investing. Benjamin Graham and Warren Buffett have both used P/B as a key metric for identifying undervalued stocks. A P/B below 1.0 means the market values the company at less than its net assets — a classic value signal, though it can also indicate that the assets are overvalued on the balance sheet or that the business is in decline. Understanding the balance sheet explained is important for interpreting book value correctly.

The P/B ratio is not universally useful — it excels in specific industries and situations.

Banks and financial institutions

The financial sector is where P/B shines. Banks, insurance companies, and other financial institutions hold most of their value in financial assets that are regularly marked to market. This makes book value a reasonably accurate measure of net worth, and P/B becomes the default valuation metric for the industry.

Asset-heavy businesses

Companies in real estate, manufacturing, energy, and transportation own significant tangible assets. For these businesses, book value provides a useful floor for valuation, since assets can theoretically be sold or used as collateral.

Liquidation scenarios

P/B is also useful when assessing downside risk. A company trading close to book value may have limited downside if its assets are fairly valued. This is why P/B is often used alongside the P/E ratio explained to get both an earnings and an asset perspective.

The P/S and P/B ratios answer different questions. P/S tells you about revenue generation — how the market values each dollar of sales. P/B tells you about net assets — how the market values the company’s balance sheet. Neither is inherently better; each provides a different angle.

Choose P/S when: the company is not yet profitable, earnings are volatile or cyclical, you are comparing companies at different profitability stages, or revenue growth is the primary value driver. P/S is an income statement valuation tool.

Choose P/B when: the company is in financial services, has significant tangible assets, or you are assessing downside risk and liquidation value. P/B is a balance sheet valuation tool.

Many experienced investors use both P/S and P/B alongside the P/E ratio to build a complete valuation picture. For a broader perspective, also explore the EV/EBITDA ratio which accounts for debt and cash in the valuation.

Neither the P/S ratio nor the P/B ratio is perfect. Understanding their limitations is essential for using them correctly.

P/S ignores profitability

A company can have high revenue and a low P/S ratio but still be a terrible business if it spends more than it earns. Revenue is not profit. Always check profit margins and cash flow alongside the P/S ratio. A low P/S on unprofitable revenue is not a bargain.

P/B is less useful for intangible assets

For technology, software, and service companies, most value comes from intangible assets like intellectual property, brand, and customer relationships — none of which appear at fair value on the balance sheet. A tech company with a P/B of 10 or 20 may be perfectly normal, since its real assets are not captured in book value.

Both can be distorted by one-time events

A large asset write-down can crater book value and inflate P/B. A one-time revenue spike can distort P/S. Always look at multi-year trends rather than a single data point to get the full picture.

Return to the full fundamentals guide to explore how P/S and P/B fit alongside other valuation tools.

Continue learning by exploring the EV/EBITDA ratio or revisit the P/E ratio explained. Or return to the full fundamentals guide to explore all ratios and metrics.