Price-to-Sales and EV/EBITDA: Alternative Valuation Metrics for Real-World Investing

Why P/E Isn't Enough Anymore

You've probably heard of the price-to-earnings ratio. It's the go-to number for judging if a stock is cheap or expensive. But what happens when a company isn't making money? Or when it has a ton of debt? Or when it's spending billions on equipment that doesn't show up on the income statement? That's where P/E falls apart. That's why smart investors and analysts rely on two other metrics: Price-to-Sales (P/S) and Enterprise Value to EBITDA (EV/EBITDA). These aren't fancy buzzwords-they're practical tools used in every major merger, private equity deal, and tech IPO over the last 20 years.

Take Amazon in 2023. Its market cap was $1.5 trillion, and it made $600 billion in sales. That gives it a P/S ratio of 2.5. But its net income? Barely anything. Its P/E ratio was over 55. Which one tells you more about the business? P/S does. It doesn't care if profits are negative. It just looks at how much you're paying for every dollar of revenue. That's why investors use P/S for early-stage tech companies, SaaS startups, and even retailers that are reinvesting everything back into growth.

Now consider Apple in Q2 2024. Its enterprise value was $2.85 trillion. Its EBITDA? $132 billion. That gives it an EV/EBITDA of 21.6. That number tells you something deeper than P/E ever could: how much the entire company-debt, equity, cash, all of it-is worth relative to its core operating cash flow. And that’s why private equity firms, investment banks, and corporate acquirers use EV/EBITDA in over 90% of M&A deals today.

What Exactly Is EV/EBITDA?

EV/EBITDA is a mouthful, but it’s simple once you break it down. Enterprise Value (EV) is the total price to buy the whole company-not just the stock, but also the debt you’d inherit and minus the cash you’d get. So:

EV = Market Cap + Total Debt - Cash and Equivalents

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s not profit. It’s cash flow from operations before you pay for things like loans, taxes, or equipment wear-and-tear. It’s the raw operating engine of the business.

So EV/EBITDA = How much you pay for the whole company / How much cash it generates from running the business.

Why is this better than P/E? Because P/E only looks at what’s left after taxes, interest, and accounting charges. EV/EBITDA ignores those. It levels the playing field between a company with lots of debt and one with none. It also ignores different tax rates and depreciation methods-things that make P/E comparisons useless across industries.

For example, in 2023, Morgan Stanley compared Deere & Company and its financial arm. One had 30% debt. The other had 70%. Their P/E ratios were wildly different: 15.2 vs. 24.7. But their EV/EBITDA? Almost identical-12.5 and 12.8. That’s the power of this metric. It cuts through financial noise.

When Price-to-Sales Makes Sense

P/S is the go-to for companies that aren’t profitable yet. Think Zoom in 2020. Revenue was exploding. Earnings? Negative. P/E didn’t exist. But P/S was 55. Investors didn’t care about profits-they cared about growth rate, customer retention, and market share. P/S gave them a way to compare Zoom to other fast-growing tech firms.

Today, 78% of SaaS companies are valued using P/S. Why? Because subscription revenue is predictable. If you’re paying $10 for every dollar of recurring revenue, and your customers stick around, that’s a good bet. CrowdStrike traded at an 8x P/S in early 2024. Within months, its stock doubled. Why? Because its net dollar retention was over 130%-meaning existing customers were spending more, not less. P/S alone didn’t tell the story, but it was the starting point.

But here’s the trap: P/S doesn’t care about profitability. WeWork had an 8.5x P/S in 2019. It was growing fast. But it was burning cash. Every dollar of revenue cost $1.20 to generate. When the truth came out, the stock collapsed. P/S doesn’t warn you about that. You need to dig deeper-look at gross margins, customer acquisition costs, and churn.

Professor Zoltan Pozsar from Columbia Business School says this plainly: “P/S ratios above 10 for non-SaaS companies should trigger immediate scrutiny.” Only 12% of those companies ever became profitable. Bed Bath & Beyond had a P/S of 1.2 before it went bankrupt. It was losing money every quarter. The market was still paying for future hope. That’s the danger.

Where EV/EBITDA Fails

EV/EBITDA isn’t perfect either. It ignores capital expenditures-real money spent to keep the business running. That’s a big problem for industries like utilities, oil and gas, or manufacturing. A power plant needs new turbines every 15 years. That costs billions. But EBITDA doesn’t subtract that. So a utility company might look cheap on EV/EBITDA, but it’s actually spending half its cash flow just to stay alive.

Take Tesla in 2022. Its EV/EBITDA was 50x-way above the auto industry average of 6-8x. Many analysts thought it was overvalued. But Tesla was reinvesting 40% of its EBITDA into R&D and factory expansion. EV/EBITDA didn’t capture that. It just saw a high multiple and assumed the company was overpriced. The stock dropped 65% anyway-but not because the business was bad. Because the market realized the growth story was slowing.

Another flaw: depreciation. Semiconductor makers like TSMC have huge depreciation charges-25-30% of their EBITDA. That’s because building a chip factory costs $20 billion. But that’s not a cash expense-it’s an accounting entry. So EV/EBITDA overstates their cash flow by $10-12 billion a year. That makes them look more profitable than they really are.

And don’t forget: EBITDA can be manipulated. Companies add back stock-based compensation, restructuring costs, one-time legal fees-even advertising spend. Meta added back $20 billion in stock-based pay in 2023. That’s not cash. But if you use that inflated EBITDA, your EV/EBITDA looks artificially low. That’s why the CFA Institute now recommends companies disclose exactly what they’re adding back.

How Analysts Use These Metrics in Real Life

On Wall Street, these aren’t just numbers. They’re decision filters.

Goldman Sachs analysts told the Wall Street Oasis forum they use EV/EBITDA to screen targets for buyouts. Why? Because one-time tax credits can make P/E look great when it’s not. Walmart’s P/E dropped from 28 to 22 in 2023 after a $4 billion tax refund. EV/EBITDA stayed at 10.5. That’s the real number.

On Reddit’s r/SecurityAnalysis, 57% of retail investors say EV/EBITDA is more reliable than P/E for cyclical industries like autos. Ford’s P/E swung from 3 to 25 between 2020 and 2023. EV/EBITDA stayed between 5 and 7. That’s because EBITDA smooths out the ups and downs of sales.

But here’s the catch: most people don’t calculate EV correctly. They forget about operating leases. Target’s 2022 EV/EBITDA jumped from 8.2 to 9.7 when they included $285 billion in lease obligations that weren’t on the balance sheet. That’s a 18% error. If you’re using public data without adjusting, you’re flying blind.

For P/S, SaaS investors use it to find hidden gems. But they don’t stop there. They pair it with net dollar retention. If a company has a P/S of 10 and retention over 120%, it’s a buy. If it’s 10 and retention is 90%, it’s a red flag. Peloton traded at 7x P/S in 2021. Revenue was growing. But customer acquisition costs were rising. Payback periods hit 24 months. The stock crashed. P/S didn’t lie-it just wasn’t enough.

What to Watch in 2025 and Beyond

Things are changing. The SEC now requires companies to explain how they calculate adjusted EBITDA. Over 67% of S&P 500 firms now do this. That’s forcing more transparency.

By 2026, Morgan Stanley will start adjusting EBITDA for carbon emissions. High-emission companies might see their multiples drop by 5-15%. That’s a new layer of analysis you’ll need to consider.

And in 2027, new accounting rules (IFRS 18) will force companies to report leases and pensions the same way everywhere. That could reduce EBITDA volatility by 20-30%. That means EV/EBITDA might become even more reliable.

For SaaS, the future isn’t P/S-it’s Price-to-Net-Dollar-Retention. Investors are shifting from how much you sell to how much your customers keep spending. That’s the real measure of quality.

AI won’t replace these metrics. It’ll just make them faster. The core logic-understanding what’s truly being paid for-will stay the same.

Final Takeaways: When to Use What

• Use EV/EBITDA when comparing companies with different debt levels, tax rates, or capital structures. Best for mature industries, industrials, and M&A.
• Use P/S when earnings are negative or volatile. Best for early-stage tech, SaaS, and high-growth retailers.
• Avoid P/E when earnings are negative, manipulated, or distorted by one-time events.
• Always dig deeper. No metric tells the whole story. Check margins, cash flow, capex, and customer behavior.
• Adjust for leaks. Add back operating leases. Subtract stock-based compensation. Know what’s included in EBITDA.

These metrics aren’t magic. But they’re the best tools we have to cut through the noise. If you’re investing in public companies, you need to understand them. Not because they’re perfect. But because everyone else does.