📚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)
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.
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