P/E ratio vs P/B ratio
P/E (price to earnings) tells you how much you pay for each rupee of yearly profit. P/B (price to book) tells you how much you pay for each rupee of net assets on the balance sheet. P/E suits steady profit-making companies; P/B is more useful for banks, financial companies and businesses whose profit swings a lot.
| Point | P/E ratio | P/B ratio |
|---|---|---|
| Formula | Share price ÷ earnings per share | Share price ÷ book value per share |
| Based on | Profit (P&L statement) | Net assets (balance sheet) |
| Works when profit is negative? | No, P/E is meaningless | Yes, as long as book value is positive |
| Best suited to | Steady earners, consumer and IT companies | Banks, NBFCs, asset-heavy businesses |
| Main trap | Looks cheap at the peak of a profit cycle | Book value may be overstated |
| Read alongside | Profit growth | ROE |
What each ratio means
A P/E of 30 means you pay ₹30 for every ₹1 the company earns in a year. A high P/E is a bet that profit will grow fast.
Book value is total assets minus total liabilities: roughly what belongs to shareholders on paper. A P/B of 2 means you pay ₹2 for every ₹1 of that net worth.
A worked example
Say a share trades at ₹200. The company earned ₹10 per share last year and has a book value of ₹100 per share. Its P/E is 20 and its P/B is 2.
Now say a bad year cuts earnings to ₹2 per share. P/E jumps to 100, which looks expensive, though the price never moved. P/B stays at about 2, because one bad year barely changes book value. That is why P/B is steadier for businesses with volatile profit.
How P/B links to ROE
A company with high ROE earns a lot on its book value, so investors usually pay a higher P/B for it. A low P/B with low ROE may simply be fair, not cheap. Always ask why a stock trades below or above book.
For cyclical companies like steel or cement, a very low P/E after a record year is often a peak, not a bargain. Judging them on normal-year profit, and on P/B, gives a calmer view.
When to use which
Use P/E for companies with steady, positive earnings, and compare it with the sector and the company’s own past. Use P/B for banks, NBFCs and businesses with lumpy profit, and always read it with ROE.
Common questions
Which is better, P/E or P/B?
It depends on the company. P/E works well for steady earners, while P/B is more useful for banks, NBFCs and cyclical businesses.
Why do banks use P/B instead of P/E?
A bank’s assets are mostly loans recorded close to their value, so book value is meaningful. Its profit can swing with bad-loan provisions.
Is a P/B below 1 always cheap?
No. It can mean the market doubts the book value, for example because of bad loans or weak returns.
Practise reading company numbers, free
Short chapters, then real calls graded on your reasoning, not luck. No money involved.