P/E vs P/S Ratio: Which Valuation Metric Should You Use?

#The Core Difference

P/E is about profitability. P/S is about scale.

A company with $10B revenue and 20% margins earns $2B. At a $50B market cap: - P/S = 5.0x - P/E = 25.0x

#When to Use P/E

Best for: - **Profitable companies** — P/E requires positive earnings - **Mature businesses** — Stable earnings make P/E meaningful - **Comparing within sectors** — Same industry, similar margins - **Income-focused analysis** — How many years of earnings to pay back your investment

P/E Benchmarks

Deep dive: P/E Ratio Explained →

#When to Use P/S

Best for: - **Unprofitable companies** — SaaS, biotech, early-stage tech - **Cyclical businesses** — When earnings are temporarily depressed - **Cross-sector comparisons** — Revenue is more stable than earnings - **Growth companies** — Revenue shows scale even without profits

P/S Benchmarks

Deep dive: Price-to-Sales Explained →

#Head-to-Head Comparison

#The Hidden Relationship

P/E and P/S are actually connected through profit margins:

P/S × Net Margin = P/E (approximately)

Or equivalently: P/S = P/E × Net Margin

This means: - A stock with P/S of 10x and 10% margins has an implied P/E of 100x - A stock with P/S of 2x and 20% margins has an implied P/E of 10x

When evaluating unprofitable companies by P/S, always ask: what margins will this company achieve at maturity? That converts P/S into an implied P/E.

#Which Is Better for Factor Investing?

Neither in isolation. Our Value factor uses earnings yield (inverse of P/E but using enterprise value) and cash flow yield — both of which account for profitability.

Pure P/S-based value screens can be misleading because they don't distinguish between a cheap, highly profitable business and a cheap, money-losing business.

#The Bottom Line

Compare stocks with our tools →

Read our full methodology →