E Lies to Your Face (and Another Multiple Tells the Truth)

You're sitting over a screener, your coffee is getting cold, and you're browsing through three tech companies. For two of them, the P/E column either shows a dash or a crazy number like 480. First reaction: "this is overpriced nonsense, next." And right at that moment, you might have just discarded a company that was growing by tens of percent annually — just because you were looking at an indicator that doesn't fit it at all.

P/E (price to earnings) is the king among multiples. But the king rules only where the company is consistently profitable. As soon as the profit is negative, temporarily distorted, or still on the way, P/E stops saying anything useful — and starts lying. Fortunately, it has two unjustly overlooked siblings: P/S and P/B.

Why P/E Sometimes Collapses

P/E = stock price ÷ earnings per share. The problem is in the denominator. Profit is the easiest item to "bend" in the entire statement.

Imagine three situations where P/E won't help you:

1) Negative profit. The company reports a loss of −2 CZK per share. P/E comes out negative. What does "P/E −15" mean? Nothing. Mathematically, it's nonsense that the screener either hides or shows you a dash. Meanwhile, the company might have revenues of 40 billion CZK and grow by 35% annually.

2) One-time items. The company normally earns 5 billion CZK annually. This year, however, it sold a building with a profit of 4 billion CZK and accounted for a penalty of −1 billion CZK. Suddenly, the accounting profit is 8 billion CZK — P/E looks 40% cheaper than the company really is. Next year it "corrects" and you don't understand why the multiple jumped.

3) Cyclical bottom and peak. In mining or automotive companies, profit at the bottom of the cycle is negligible (P/E shoots into the hundreds) and at the peak, it's enormous (P/E looks ridiculously low). Paradoxically, low P/E in a cyclical company often means an impending decline, not an opportunity.

In all three cases, you need a different key.

The Tale of Two Coffee Stands

Imagine two coffee stands in a busy square.

Stand A (traditional café): has been operating for ten years, has regular customers, and generates a net profit of 50,000 CZK every month. Here, P/E makes perfect sense — you're buying a stable cash flow.

Stand B (coffee subscription startup): is in its first year. It has huge revenues thanks to subscriptions for thousands of people, but all the money is immediately reinvested — new coffee machines, mobile apps, advertising. At the end of the year, it's accounting for a loss of 100,000 CZK.

If you're only looking at P/E for Stand B, you see a negative value and say "uninvestable." But is that true? No. Stand B is building infrastructure and a client base. And its real size is described by revenues, not temporarily negative profit. This is exactly where you reach for P/S.

P/S: The Multiple for Companies That (Yet) Don't Make a Profit

P/S = market capitalization ÷ annual revenues. In other words: how much you pay for each crown of annual turnover.

Analogy: you're buying a bakery. You don't just ask how much it earned this year (it might have had an expensive oven renovation), but mainly — how much it sells overall. Revenues are the hardest number to manipulate. Either customers came and paid, or they didn't.

Why P/S is useful:

Works even at a loss. Revenues are always positive, so P/S gives a number where P/E returns a dash.
Reveals the growth story. For a company that reinvests all its profit back into growth, low or negative profit is intentional, not a weakness.

Specific example. Two software companies:

	Company A	Company B
Revenues	10 billion CZK	10 billion CZK
Market capitalization	40 billion CZK	120 billion CZK
P/S	4	12
Profit	loss	loss

P/E tells you "dash" for both. But P/S immediately reveals that you're paying 3× more for Company B for the same crown of revenues. Either the market expects much faster growth for B, or it's just more expensive. At least you know what to ask.

When P/S deceives: it ignores profitability and debt. A company with P/S 1 and a margin of 3% can be more expensive than a company with P/S 3 and a margin of 30%. And what if it consumes 1.20 CZK in costs for every crown earned and burns cash towards bankruptcy? Low P/S won't save you. Revenues without margin are just money spinning — that's why you should always read P/S along with gross or operating margin.

P/B: The Multiple for Banks, Insurers, and REITs

P/B = stock price ÷ book value per share (equity per share). How much you pay for one crown of the company's net worth.

Analogy: imagine a wallet with exactly 100 CZK in cash. The owner offers it to you for 80 CZK. Would you buy it? Of course — you're buying a crown for 80 halers. That's P/B 0.8.

Why banks and insurers? Because their "factory floor" is the balance sheet itself — loans, securities, reserves. Assets are revalued close to market value, so the book value makes real sense. For a software company, the book value is almost useless (its value is in people's heads and the brand, not in the balance sheet), but for a bank, it's the backbone of valuation.

Specific example. A bank with equity of 200 CZK per share:

Stock price 180 CZK → P/B 0.9 → the market values the bank BELOW book value. Either it's cheap, or the market expects write-offs of bad loans.
Stock price 300 CZK → P/B 1.5 → the market is willing to pay a premium, typically for a bank with high return on equity (ROE).

Key connection: ALWAYS read P/B with ROE. A bank with ROE of 15% deserves a premium P/B; a bank with ROE of 5% and P/B 1.5 is suspiciously expensive. High ROE + low P/B = an interesting combination worth exploring.

When P/B deceives: for companies without physical assets (technology, consulting), the book value is undervalued, so P/B comes out optically high — and it means nothing. And beware of "goodwill" and outdated assets: old, practically unsellable buildings listed in accounting for millions can inflate the book value, and low P/B is then just a trap for naive investors.

Data on the Side: What Each Sector Can Bear

Roughly (long-term conventions, not a rule):

Banks historically hover around P/B 0.8–1.5.
Mature tech companies typically carry a higher P/S than industry — revenues with high margins and growth are valued more expensively by the market.
Grocery retail runs on thin margins, so the standard is P/S below 1 — there, P/S 3 would mean extreme overpricing.
REITs are often compared through P/B and specific metrics (FFO), because accounting profit distorts property depreciation, which doesn't really lose value.

Lesson: a multiple doesn't have a universal "correct" value. Always compare it within the same sector, not across. Comparing the P/S of a software company with the P/S of an automaker is like comparing apples to tractors.

Practical Framework: Which Multiple for Which Company

A simple decision-making process you can use today:

Does the company earn consistently and predictably? → P/E makes sense (but check for one-time items — compare this year's profit with the 3–5 year average).
Is the company loss-making or rapidly growing? → switch to P/S and add the margin.
Is it a bank, insurer, or asset-rich company? → P/B in combination with ROE.
Is the company cyclical? → don't trust a single year, look at normalized profit over the entire cycle.
Always combine at least two multiples. One indicator = one perspective. Three perspectives = finally a picture.

Mini-exercise: take one company from your watchlist and write down P/E, P/S, and P/B side by side. Then add the margin and ROE. You'll see that for some companies, three-quarters of those numbers don't make sense — and that's exactly the information you're looking for.

In QMA: instead of manually transcribing from statements, you have P/E, P/S, and P/B together in one screener line, including margins and ROE. You can filter, for example, only banks with low P/B and simultaneously high ROE — and tech companies, on the other hand, by P/S and revenue growth. The screener thus automatically shows the multiple that fits the type of company, instead of letting you look at misleading P/E.

Takeaway

Use P/E only where the company earns consistently and predictably. In losses, one-time items, and cyclical bottoms---

Compliance Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a financial advisor before making investment decisions.

📚P/S and P/B: Two Overlooked Multiples That Reveal What P/E Hides

P/S and P/B: When P/E Lies to Your Face (and Another Multiple Tells the Truth)

Why P/E Sometimes Collapses

The Tale of Two Coffee Stands

P/S: The Multiple for Companies That (Yet) Don't Make a Profit

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P/B: The Multiple for Banks, Insurers, and REITs

Data on the Side: What Each Sector Can Bear

Practical Framework: Which Multiple for Which Company

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