P/E, P/S, and P/B Ratios: Complete Valuation Guide [2024]

Master the key equity valuation ratios for effective company analysis

Quick Navigation

• Price-to-Earnings (P/E)
• Price-to-Sales (P/S)
• Price-to-Book (P/B)
• Industry Applications
• Comparative Analysis

Understanding Key Ratios 📊

Overview of Valuation Metrics

"These three ratios form the foundation of relative valuation, each offering unique insights into company value." - Investment Analysis Review

Price-to-Earnings (P/E) Ratio 💰

Definition and Calculation

Formula:

P/E Ratio = Stock Price / Earnings Per Share (EPS)
or
P/E Ratio = Market Capitalization / Net Income

Types of P/E

Typical P/E Ranges

Price-to-Sales (P/S) Ratio 📈

Definition and Calculation

Formula:

P/S Ratio = Stock Price / Sales Per Share
or
P/S Ratio = Market Capitalization / Annual Revenue

When to Use P/S

Best Applications:
1. ✅ Unprofitable companies
2. ✅ High-growth startups
3. ✅ Cyclical businesses
4. ✅ Turnaround situations

Typical P/S Ranges

Price-to-Book (P/B) Ratio 📚

Definition and Calculation

Formula:

P/B Ratio = Stock Price / Book Value Per Share
or
P/B Ratio = Market Capitalization / Total Equity

Applications

Best Uses:

1. Financial Institutions
2. Asset-heavy Companies
3. Value Stock Screening
4. Liquidation Analysis

Typical P/B Ranges

Comparative Analysis 🔍

Ratio Selection Guide

Industry-Specific Applications

Technology Sector:

Primary: P/S Ratio
- High growth
- Often unprofitable
- Revenue focus

Secondary: P/E Ratio
- For mature tech
- Profitable companies

Financial Sector:

Primary: P/B Ratio
- Asset-based
- Regulatory focus
- Capital intensity

Secondary: P/E Ratio
- Earnings stability
- Dividend capacity

Advanced Considerations 🎯

1. Growth Adjustment

PEG Ratio:

PEG = P/E Ratio / Annual EPS Growth Rate

2. Quality Metrics

Common Pitfalls ⚠️

1. P/E Ratio Issues

Warning Signs:
- Cyclical earnings
- One-time items
- Accounting changes

2. P/S Ratio Limitations

Key Concerns:
- Ignores profitability
- Revenue quality
- Margin differences

3. P/B Ratio Problems

Implementation Guide 📋

Analysis Framework

1. Industry Selection

   • Business model
   • Growth stage
   • Asset structure

2. Ratio Selection

   • Company characteristics
   • Analysis purpose
   • Data availability

3. Peer Comparison

   • Similar companies
   • Market conditions
   • Growth rates

Best Practices ✅

Analysis Checklist

1. Data Quality

   • Recent financials
   • Consistent accounting
   • Normalized numbers

2. Context

   • Industry norms
   • Growth phase
   • Market conditions

3. Multiple Validation

   • Use multiple ratios
   • Cross-check results
   • Consider trends

FAQs

Q: Which ratio is best overall?
A: No single "best" ratio - each serves different purposes and situations.

Q: How often should ratios be updated?
A: Quarterly for public companies, or when significant changes occur.

Summary: Key Takeaways

✅ Remember:
1. P/E for profitable companies
2. P/S for growth companies
3. P/B for asset-heavy firms
4. Consider multiple ratios
5. Industry context matters

Related Topics

• Valuation Methods
• Financial Analysis
• Industry Research
• Growth Metrics

Last Updated: October 2024

Keywords: P/E ratio, P/S ratio, P/B ratio, valuation metrics, financial ratios