Question

Compare and contrast PE, PS, PCF, and PB ratios

Answer 1

PE means Price to earnings ratio, PS means Price to sales ratio, PCF means Price to cash flow ratio, PB means Price to book value ratio. These ratios are used for the comparative valuation or peer valuation of a company.

PE ratios are mostly used comparative ratio which accounts for the price with respect to its net profit or earnings available for the shareholders. Basically it gives an idea that how much the investor are willing to pay according to the earnings of a company. But for the company where earnings are negative, we go for PS ratio. Price to sales ratio is used in the case of loss-making companies as they have negative earnings.

PCF is the price to cash flow ratio which is a better alternative of earnings as they can be manipulated by depreciation but PCF considers the operating cash flow which accounts for the depreciation. Hence PCF is popular and accurate than PE.

PB is used in the case of banks where the mark-to-market approach is followed i.e. the book values are constantly updated with the market values. So the PB approach is more suitable in this case.