Returns to Trading Strategies Based on Price-to-Earnings and Price-to-Sales Ratios

Abstract

We examine returns to trading strategies based on values of the Price-to-Earnings (P/E) and Price-to-Sales (P/S) ratios. We show that the excess returns to trading strategies based on the P/S ratio is significantly higher than those for the more commonly used P/E ratio. We also show that using a combination of both the P/S and P/E ratios provides excess returns higher than strategies using these ratios individually. These results are robust across exchange listings and firm size. Finally, we document superior excess returns using a trading strategy based on the tendency of certain industries to have low or high P/E and P/S ratios.