Price-to-Sales and Price-to-Book
Two multiples that work where earnings do not: one anchored to revenue, the other to the balance sheet. Each is useful in a narrow set of situations and misleading outside it.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- The price-to-sales ratio works where there are no earnings, and ignores whether sales are profitable.
- It is only comparable between companies with similar margins.
- The price-to-book ratio is anchored to accounting equity, which reflects historical cost.
- Book value means much more for a bank than for a software company.
- Goodwill from acquisitions inflates book value with the premium paid for past deals.
MAD Academy Training Video · 0:45
For When There Are No Earnings
Price-to-sales and price-to-book work where P/E cannot, and each has a specific blind spot you have to hold in mind.
This lesson is part of a Stock Alerts + Tools plan.
Price-to-sales
P/S = market capitalization / trailing twelve-month revenue
Revenue is the most stable line on the income statement and it is positive far more often than net income, so this multiple keeps working for early-stage and loss-making companies where the P/E ratio cannot be computed.
The cost of that stability is that the ratio is blind to profitability. A dollar of revenue at an 85 percent gross margin and a dollar at 8 percent are treated as identical, and they are not remotely. Comparing P/S across different margin structures produces conclusions that are simply wrong.
A partial correction is to compare enterprise value to revenue instead, which at least accounts for debt, and to compare only within a margin band. Some practitioners divide the multiple by gross margin to make the comparison explicit, which is crude and better than ignoring the problem.
Price-to-book
P/B = market capitalization / shareholders' equity
- equity as carried on the balance sheet, not any estimate of what assets are worth
The denominator is an accounting figure built largely from historical cost. Property bought thirty years ago sits at its purchase price less accumulated depreciation, which may bear no relation to what it would fetch today.
The distortion runs in both directions. Historical cost understates the value of appreciated property and overstates the value of goodwill from an acquisition that has since disappointed but not yet been written down.
Where book value means something
| Business type | Does book value inform? |
|---|---|
| Banks and insurers | Yes. Assets are largely financial and marked close to fair value. |
| REITs and asset-heavy industrials | Partly. Property at historical cost can badly understate value. |
| Software and services | Rarely. The valuable assets are people, code and brand, none of which are on the balance sheet. |
| Serial acquirers | Distorted. Goodwill inflates book value with the premium paid for past deals. |
This is why price-to-book is a central metric in bank analysis and close to meaningless for a company whose principal assets are intangible and internally generated. A software company that spent a decade building its product expensed all of it, so the asset that makes it valuable appears nowhere on its balance sheet.
For banks the ratio is paired with return on equity, because the two answer the same question from opposite ends: what the equity earns and what the market pays for it.
Scroll the chart sideways to see all of it.
Why price-to-sales is used at all
Sales are the least manipulable line in a set of accounts and the least informative about profitability. That combination defines exactly where the ratio earns its place: situations where earnings do not exist or cannot be trusted.
- Companies not yet profitable, where every earnings-based multiple is undefined or negative.
- Cyclical troughs, where earnings are temporarily near zero and the multiple on them is meaningless.
- Companies whose earnings are heavily adjusted, where the sales line is the one figure defined the same way for everyone.
- Comparisons across companies at different stages of margin development within one industry.
The corresponding weakness is that it assigns no value to margin. Two companies with identical revenue are treated identically whether one keeps thirty percent of it and the other loses money on every sale, which means a price-to-sales comparison is only meaningful within a set of businesses whose margins could plausibly converge.
This is why the ratio is usually paired with a view on what margin the business will reach at scale. A price-to-sales multiple without a margin assumption is half of an argument, and the missing half is the one that determines the answer.
Book value and what has happened to it
Price-to-book was once among the most useful ratios available, and its usefulness has declined for a structural reason rather than a fashionable one: the composition of listed companies has shifted toward businesses whose assets are not recorded on a balance sheet.
When the listed universe was dominated by manufacturers, book value approximated the replacement cost of the productive assets. In a universe dominated by companies whose value lies in software, brands, data and people, the balance sheet records the cash, the buildings and the goodwill from acquisitions, and nothing else that matters.
| What happened | Effect on book value |
|---|---|
| Research expensed as incurred | A decade of accumulated capability recorded at nothing |
| Buybacks above book value | Equity reduced, so the ratio rises with no change in the business |
| Acquisitions | Goodwill added, so the ratio falls with no change in the business |
| Impairments | Equity reduced abruptly, and only ever downward |
The second and third rows deserve emphasis because they push in opposite directions for reasons unrelated to value. A company that has bought back stock for years can report negative book equity while being entirely solvent, which makes the ratio undefined rather than extreme.