Price-to-Book and Price-to-Sales
Learn when and how to use P/B and P/S ratios for stock valuation, including industry-specific applications.
Learning Objectives
- Calculate and interpret Price-to-Book ratios
- Understand when P/B is most useful
- Master Price-to-Sales for unprofitable companies
- Learn sector-appropriate valuation metrics
Price-to-Book and Price-to-Sales#
While P/E is the most popular valuation metric, it doesn't work for every situation. Price-to-Book (P/B) and Price-to-Sales (P/S) ratios fill important gaps in your valuation toolkit.
Price-to-Book (P/B) Ratio#
The P/B ratio compares a company's market value to its accounting book value.
P/B Ratio = Market Price per Share / Book Value per Share
Or equivalently: Market Capitalization / Total Shareholders' Equity
A P/B of 1.0 means the stock trades at exactly its book value.
Understanding Book Value#
Book value represents the net asset value of a company—what shareholders would theoretically receive if all assets were sold and all liabilities paid off.
Book Value = Total Assets - Total Liabilities = Shareholders' Equity
Interpreting P/B#
| P/B Range | Interpretation |
|---|---|
| < 1.0 | Trading below book value—potential bargain or value trap |
| 1.0 - 2.0 | Reasonable for asset-heavy businesses |
| 2.0 - 4.0 | Premium valuation, strong business expected |
| > 4.0 | High premium—justified by strong returns or growth |
When P/B Works Best#
P/B is most useful for companies where tangible assets are central to the business:
| Industry | Why P/B Matters |
|---|---|
| Banks | Assets (loans) are the business; regulated by book value |
| Insurance | Investment portfolios drive value |
| REITs | Property values are core asset |
| Manufacturing | Plants and equipment drive production |
| Utilities | Rate base tied to asset values |
Real-World Example: Banking#
JPMorgan Chase financial metrics:
- Stock Price: $170
- Book Value per Share: $95
- P/B Ratio: 1.79x
For a major bank, a P/B under 2.0 with strong ROE is considered reasonable. Banks trading below 1.0 P/B often signal market concerns about asset quality.
Intangibles Problem
P/B is less meaningful for companies with significant intangible assets (patents, brands, software) that don't appear fully on the balance sheet. A tech company's P/B of 15x doesn't mean it's overvalued—it means most value isn't in book assets.
P/B Limitations#
- Ignores intangible assets: Brand value, patents, human capital aren't captured
- Historical cost accounting: Assets recorded at purchase price, not current value
- Negative book value: Possible if accumulated losses exceed equity
- Industry dependence: Meaningless for asset-light businesses
Price-to-Sales (P/S) Ratio#
The P/S ratio compares market value to revenue—useful when earnings don't exist or are distorted.
P/S Ratio = Market Capitalization / Total Revenue
Or: Stock Price / Revenue per Share
Lower P/S generally indicates better value, but profitability matters too.
Why Use P/S?#
P/S solves several problems with P/E:
| P/E Problem | How P/S Helps |
|---|---|
| Company has no earnings | P/S still works—all companies have revenue |
| Earnings are volatile | Revenue is typically more stable |
| Earnings manipulated | Revenue harder to manipulate |
| One-time charges distort | Revenue unaffected by many adjustments |
Interpreting P/S by Sector#
Appropriate P/S ranges vary significantly by industry profitability:
| Sector | Typical P/S | Reason |
|---|---|---|
| Software/SaaS | 5-15x | High margins, recurring revenue |
| Retail | 0.3-1.0x | Low margins, high volume |
| Manufacturing | 0.5-2.0x | Moderate margins |
| Healthcare | 2-6x | Growth potential, margins vary |
| Consumer Staples | 1-3x | Stable demand, moderate margins |
The Margin Connection#
P/S must be considered alongside profit margins. Two companies at the same P/S but different margins have different values:
| Company | P/S | Net Margin | Implied P/E |
|---|---|---|---|
| Company A | 3.0x | 15% | 20x |
| Company B | 3.0x | 5% | 60x |
Company A is generating more profit per dollar of sales, making its 3.0x P/S more attractive.
Quick Check
P/S × Net Margin ≈ P/E equivalent. A 4x P/S with 10% margin implies roughly 40x P/E. This helps you gauge if a P/S ratio is reasonable given profitability.
When P/S Works Best#
- Unprofitable growth companies: SaaS, biotech, early-stage tech
- Turnaround situations: Companies temporarily losing money
- Cyclical comparisons: When earnings swing wildly
- Industry comparisons: Normalizes for company size
P/S Limitations#
- Ignores profitability: Revenue without profit creates no shareholder value
- Revenue quality: Not all revenue is equal (one-time vs. recurring)
- Growth not captured: Doesn't reflect revenue growth rate
- Debt ignored: Like P/E, doesn't account for capital structure
Choosing Between P/E, P/B, and P/S#
| Situation | Best Metric |
|---|---|
| Profitable, stable company | P/E |
| Bank or financial institution | P/B |
| Insurance company | P/B |
| REIT or real estate | P/B |
| Unprofitable growth company | P/S |
| Cyclical at earnings peak/trough | P/S |
| Manufacturing company | P/B or P/E |
| Software/SaaS company | P/S with margin analysis |
Multi-Metric Approach#
The best analysis uses multiple valuation metrics together:
Example: Analyzing a Regional Bank
| Metric | Value | Assessment |
|---|---|---|
| P/E | 11x | Reasonable for a bank |
| P/B | 1.2x | Slight premium to book |
| Dividend Yield | 3.5% | Attractive income |
| ROE | 12% | Above cost of equity |
Each metric tells part of the story. Together, they suggest a reasonably valued bank generating adequate returns.
Key Takeaways
- P/B = Market Price / Book Value—best for asset-heavy industries like banks and REITs
- P/B below 1.0 may signal undervaluation or problems; above 4.0 suggests intangibles drive value
- P/S = Market Cap / Revenue—works for unprofitable companies and volatile earnings
- P/S must be considered with margins: high P/S is justified only with high margins
- Tech companies often have high P/B (intangibles) and high P/S (growth expectations)
- Use multiple valuation metrics together for comprehensive analysis