In general EV metrics take into account total capital structure of an organisation (equity + debt – cash), whereas, P ratio is concerned with equity only.
When an analysis comes down to selection based on EV versus P metric, an analyst should use EV metric because it will present “truer” picture on an organisation being analysed. This will mostly become apparent when financial leverage difference is substantial between peers.
P/S is calculated from total sales (revenue) a business has generated in an accounting period, whereas, P/E is the net figure of these sales, excluding taxes and expenses. Therefore, P/E can be easily manipulated, because there’s a long way down from total sales to the earnings.
Moreover, P/E can be a negative if the company paid more expenses and taxes that it earned from sales. For these reasons, P/S is viewed as a more stable metric used to value and compare companies.
Generally, any price multiple from the following list could potentially be of concern to the analyst:
- Price to Earnings (P/E)
- Price to Book Value (P/B)
- Price to Sales (P/S)
- Price of Cash Flow (P/CF)
- Price to Dividends (P/D)
The reason being that each of these multiples uses stock price as nominator, and the stock price could in itself be overvalued by market standards. This in turn mean that analyst’s view that a stock is undervalued relative to market could be wrong because such stock in itself could be overvalued in relation to its intrinsic value of peer-to-peer valuation.