P/E ratio has one hard limitation: it needs positive earnings to mean anything. For a company that isn't profitable yet — common for fast-growing or early-stage businesses — P/E is undefined or meaningless. Price-to-sales is the valuation metric built for exactly that gap.
What it measures
Price / Sales = Market Cap ÷ Revenue
Instead of pricing the stock against profit, it prices the stock against revenue — the top line, before any of the expenses, investment, or accounting choices that determine whether a company shows a profit or a loss. Since revenue is much harder to report as negative than earnings, price-to-sales works for companies at any stage of profitability, not just already-profitable ones.
Why it's useful specifically for growth companies
A company reinvesting aggressively — heavy R&D, heavy sales and marketing spend to capture market share — can show a real loss on the income statement while still building a genuinely valuable business. P/E can't say anything useful about that stock. Price-to-sales can, because it's measuring the thing that's actually growing (revenue) rather than the thing that's deliberately being suppressed by reinvestment (near-term profit).
What it can't tell you
This is also exactly its limitation: price-to-sales says nothing about whether that revenue will ever turn into real profit. A company can have impressive revenue growth and a reasonable-looking P/S ratio while burning cash at a rate that's genuinely unsustainable — the ratio has no way to see that, since it never looks past the top line.
It's also less useful for comparing across industries with very different margin structures — a low-margin retailer and a high-margin software company will trade at structurally different "normal" P/S ratios for reasons that have nothing to do with which is the better investment.
The practical takeaway
Price-to-sales is the right tool specifically when P/E can't be used — an unprofitable or barely-profitable company — and the wrong tool to lean on alone once a company is solidly profitable and P/E becomes usable again. Pair it with free cash flow trend (is the path to profitability real and improving) rather than treating revenue multiple as the whole story.