Valuation Basics: P/E, P/S and What They Actually Tell You

A valuation multiple is a ratio between what the market pays for a company and some measure of its size or profit. The point of multiples is comparability: they let you compare a giant and a mid-size firm, or a company against its own history, with one number.

The price-to-earnings (P/E) ratio divides market value by net income - or share price by earnings per share, which is the same thing. A P/E of 25 means investors pay 25 dollars for each dollar of annual profit. High P/E usually embeds high expected growth; a low P/E can mean the market doubts the profits are durable. P/E is meaningless when earnings are near zero or negative, which is why loss-making growth companies are discussed on price-to-sales (P/S) instead.

Price-to-book (P/B) compares market value to shareholders' equity - the accounting value of assets minus liabilities. It remains the standard yardstick for banks and other financials, whose balance sheets are their business. For software or service firms, whose most valuable assets (people, brands, code) are not on the balance sheet, P/B tells you little.

Two traps finish the picture. First, earnings are an accounting number: one-off gains, write-offs or tax changes can distort a single year's P/E, so check the multi-year trend. Second, multiples only mean something in comparison - against the company's own history and against direct peers. A company page on this site gives you revenue, income and margins from official filings; combine those numbers with a market-cap figure and you can build any multiple yourself.