# Price to Sales and Price to Book > Price to sales compares market value with revenue; price to book compares it with net assets. Learn the formulas, when each works best and their main pitfalls. Source: https://learn.tradelabsai.com/fundamentals/price-to-sales-and-price-to-book/ Track: Fundamental Analysis · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Price to Sales and Price to Book", https://learn.tradelabsai.com/fundamentals/price-to-sales-and-price-to-book/ Price to sales (P/S) and price to book (P/B) are two valuation ratios that work when earnings-based measures do not. P/S compares a company's market value with its revenue, which makes it useful for young or temporarily unprofitable companies. P/B compares market value with the accounting value of shareholders' equity, which is useful for banks, insurers and asset heavy businesses. Both are simple, but each can mislead if used without context. ## Price to sales ``` P/S = market capitalisation / annual revenue = price per share / revenue per share ``` ### When P/S is useful - **Unprofitable growth companies** where earnings are negative. - **Cyclical companies** at a trough, when earnings are depressed but revenue gives a steadier base. - **Comparing companies in the same industry** with similar margins. ### The margin problem P/S ignores profitability. A company with a 30% profit margin deserves a far higher P/S than one with a 3% margin. **Example: Same P/S, different value** Retailer R and software company S each trade at 2x sales. R has a net margin of 3%, so its P/E is about 2 / 0.03 ≈ 67. S has a net margin of 25%, so its P/E is about 2 / 0.25 = 8. The same P/S implies very different valuations once margins are considered. A useful identity: P/S = P/E × net margin. Because P/S uses market cap, it also ignores debt. EV/Sales, which includes debt, is often a better choice. See [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/). ## Price to book ``` P/B = market capitalisation / shareholders' equity = price per share / book value per share ``` ### When P/B is useful - **Banks and insurers,** whose assets and liabilities are mostly financial and recorded near market value. - **Asset heavy businesses** such as real estate, shipping or industrial firms. - **Deep value screening:** stocks trading below book value. ### What P/B tells you | P/B | Possible meaning | |---|---| | Below 1 | Market values the company below its accounting net assets: possible bargain, or assets worth less than stated | | Around 1 to 3 | Typical for many established companies | | Very high | Strong intangible value (brands, software), high returns on equity, or buybacks shrinking equity | ## P/B and return on equity P/B is closely linked to return on equity (ROE). A company that earns a high ROE should trade at a higher P/B, because each dollar of book value generates more profit. ``` P/B = P/E × ROE ``` **Example: Banks and ROE** Bank A earns an ROE of 15% and trades at 1.6x book. Bank B earns an ROE of 7% and trades at 0.7x book. Bank B looks cheaper on P/B, but it earns less than its cost of equity (perhaps 10%), so investors value its equity below book. Bank A earns more than its cost of equity and trades above book. See [ROE, ROA and ROIC](https://learn.tradelabsai.com/fundamentals/roe-roa-and-roic/) and [WACC and Cost of Equity](https://learn.tradelabsai.com/fundamentals/wacc-and-cost-of-equity/). ## Pitfalls of P/B - **Intangibles are missing:** software, brands and research built internally are not in book value, so asset light companies look expensive. See [Goodwill and Intangible Assets](https://learn.tradelabsai.com/fundamentals/goodwill-and-intangible-assets/). - **Buybacks shrink equity,** raising P/B. See [Buybacks](https://learn.tradelabsai.com/fundamentals/buybacks/). - **Write downs** can suddenly reduce book value. - **Tangible book value** (excluding goodwill and intangibles) is often more conservative. ## P/B and the value factor Academic research by Eugene Fama and Kenneth French in the 1990s used book to market (the inverse of P/B) to define value stocks, which historically outperformed growth stocks over long periods. The value premium was weak for much of the 2010s, and some researchers argue book value has become less meaningful in an economy dominated by intangible assets. See [Value Factor](https://learn.tradelabsai.com/research/value-factor/). ## Frequently asked questions ### What is a good price to sales ratio? It depends on margins and growth; compare with peers in the same industry rather than using a single threshold. ### What does a price to book ratio below 1 mean? The market values the company at less than its accounting net assets, which can signal undervaluation or that the assets are worth less than reported. ### Which companies are best valued with P/B? Banks, insurers and asset heavy businesses whose balance sheets reflect their economic value reasonably well. Next, learn about income from stocks in [Free Cash Flow Yield and Dividend Yield](https://learn.tradelabsai.com/fundamentals/dividend-yield/). ## Continue learning - Next lesson: [Free Cash Flow Yield and Dividend Yield](https://learn.tradelabsai.com/fundamentals/dividend-yield/) - Previous lesson: [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/) - Related: [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/): EV/EBITDA and EV/Sales compare a company's total value, including debt, with its earnings or revenue. Learn how to calculate EV, when to use each and the limits. - Related: [Valuation Basics](https://learn.tradelabsai.com/fundamentals/valuation-basics/): Valuation estimates what a business is worth. Learn intrinsic vs relative valuation, the main multiples, how growth and risk affect value and common mistakes. - Related: [Debt, Cash and Shareholders' Equity](https://learn.tradelabsai.com/fundamentals/shareholders-equity/): Shareholders' equity is assets minus liabilities, the book value owned by shareholders. Learn its parts, how buybacks change it and why it can be negative. - Related: [Value Factor](https://learn.tradelabsai.com/research/value-factor/): The value factor buys cheap stocks and avoids expensive ones using ratios like book to market. Learn the evidence, the long drawdown and how to build it. - Related: [Goodwill and Intangible Assets](https://learn.tradelabsai.com/fundamentals/goodwill-and-intangible-assets/): Goodwill arises when a buyer pays more than an acquisition's net assets; intangibles include brands and patents. Learn how they are recorded and impaired.