metrics explained

Price to Earnings vs Price to Sales: What's the Difference?

When it comes to valuing a stock, there are two main ratios that analysts use: price to earnings (P/E) and price to sales (P/S). Both ratios give you a way to compare a company's stock price to its earnings or sales, respectively.

What is P/E Ratio?

P/E ratio is simply a company's stock price divided by its earnings per share (EPS). EPS is the portion of a company's profit that is allocated to each outstanding share of stock.

The P/E ratio is used to gauge a company's current share price in relation to its per-share earnings. A high P/E ratio means that investors are paying more for each dollar of earnings, while a low P/E ratio means they are paying less.

What is P/S Ratio?

P/S ratio is a company's stock price divided by its revenue per share. Revenue per share is the portion of a company's revenue that is allocated to each outstanding share of stock.

The P/S ratio is used to gauge a company's current share price in relation to its revenue. A high P/S ratio means that investors are paying more for each dollar of revenue, while a low P/S ratio means they are paying less.

Key Differences

There are a few key differences between P/E and P/S ratios:

  • P/E ratio is based on earnings, while P/S ratio is based on sales.
  • P/E ratio tells you how much you are paying for each dollar of earnings, while P/S ratio tells you how much you are paying for each dollar of sales.
  • P/E ratio is more commonly used than P/S ratio.

Why P/E Ratio is More Commonly Used

P/E ratio is more commonly used than P/S ratio for a few reasons:

  • P/E ratio is a more accurate measure of a company's profitability. EPS is a better measure of profitability than sales because it takes into account a company's expenses.
  • P/E ratio is more relevant when comparing companies in different industries. Sales can be affected by a number of factors, such as seasonality, that are not relevant to profitability.
  • P/E ratio is more useful when comparing companies of different sizes. Sales can be affected by a company's size, while earnings are not.

Final Thoughts

P/E and P/S ratios are both useful tools for valuing a stock. However, P/E ratio is more commonly used because it is a more accurate measure of a company's profitability.

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