What they are
Two of the simplest ratios in fundamental analysis:
P/E = Stock Price ÷ Earnings per Share (or Market Cap ÷ Net Income) P/S = Stock Price ÷ Sales per Share (or Market Cap ÷ Revenue)
P/E tells you how many years of current earnings the market is pricing in. A P/E of 20 means investors are paying $20 today for $1 of trailing earnings. P/S does the same against revenue.
Both come in "trailing" (TTM = trailing twelve months) and "forward" (analyst-estimated next-12-months) flavors. We use trailing in our grade card because forward is sell-side consensus, which has its own biases, and we'd rather anchor to what actually happened.
When to use P/E
P/E is the right ratio when net income is positive and not heavily distorted. That covers maybe 70% of the public equity universe. Mature businesses with stable earnings — consumer staples, industrials, large-cap tech, banks, established healthcare — all live in P/E land.
Rough P/E bands:
- Under 10: Either deep value or a value trap. Look at the trend and the balance sheet. Cyclicals near a cycle top routinely print P/Es of 5–8 right before earnings collapse.
- 10–15: Statistically cheap by historical standards. Most "value" picks live here.
- 15–22: Market-average territory. The S&P 500's long-run average P/E is roughly 17.
- 22–30: Premium quality. Justified if growth is real and durable.
- Above 30: Either hypergrowth that the market is pricing forward (NVIDIA in 2024), or a quality compounder commanding a premium (Costco). Worth a second look — pay this multiple only when the business is genuinely exceptional.
When to use P/S
P/S is the right ratio when net income is negative or barely positive. A company can't have a meaningful P/E if it doesn't make money — the ratio either prints as negative (which gets dropped from screeners) or infinitely high (when earnings round to zero).
P/S bands are wildly sector-dependent:
- Software / SaaS: 5–15 is normal during expansion phases. The high gross margins (80%+) mean revenue eventually becomes operating leverage.
- Mature tech, semiconductors: 3–6 typical.
- Consumer brands, retail: 1–3 is the band. P/S of 8 on a clothing retailer is a warning, not a signal of quality.
- Banks, insurers: P/S is largely meaningless — their "revenue" is net interest income, which isn't comparable to a software company's revenue. Use P/B (price-to-book) or P/E instead.
How the Bull Rankings model picks one
We classify every name into growth, value, or speculative. The speculative bucket is where we expect a meaningful fraction to be unprofitable or pre-profit — biotech, pre-revenue tech, distressed names with optionality. For speculative names we score P/S. For growth and value names we score P/E.
This is exposed in the metric card: a growth or value pick shows P/E, a speculative pick shows P/S. The grade thresholds adjust accordingly — a P/S of 5 grades B on a software speculative name, but a P/E of 5 grades A on a mature value name.
Common gotchas
- Trough earnings. A cyclical at the bottom of its cycle has artificially low earnings. P/E looks elevated even though the stock might be cheap on normalized earnings. Steel mills, refiners, semiconductor capital-equipment makers all do this. P/S smooths it out — sales don't collapse as much as profits do at a cycle low.
- One-time charges. A massive impairment, lawsuit settlement, or restructuring write-off can take TTM earnings negative even for a fundamentally profitable business. P/E briefly reads as n/m. Look at three years of earnings, not one quarter, before drawing conclusions.
- Growth that justifies the multiple. A 50× P/E sounds insane until you realize the company is growing 40%+ and will compress that multiple to 20× organically in two years. This is what PEG (covered separately) is designed to capture.
- Banks and insurers. Don't use P/S on financials. Use P/B (price-to-book) and ROE together — that's the canonical valuation pair for the sector.
- Stock-based comp adjustments. Some screeners use GAAP earnings; others use "adjusted" or "non-GAAP." A growth-stage software company can have a GAAP P/E of 200 and a non-GAAP P/E of 30. We use GAAP because it's the legally-required, comparable number across every company — but we read it knowing this discrepancy exists.
Bottom line
The choice between P/E and P/S isn't artistic — it's structural. P/E breaks down when earnings round to zero or go negative; P/S is the fallback. Once you've picked the right ratio, the band you compare to is what makes the answer useful. A 50× multiple on a hypergrowth software name is reasonable; a 50× multiple on a regional bank is hallucinatory. Sector-aware bands aren't optional.