PE and PB Ratios: Decoding the Price Tags of the Stock Market

Quick Summary

• PE (Price-to-Earnings) Ratio tells you how much you're paying for every rupee of a company's profit – like checking if you're overpaying for that premium mango

• PB (Price-to-Book) Ratio compares a stock's price to its net assets – think of it as the property valuation before buying a house

• High PE suggests the market expects future growth; Low PE could mean a bargain or trouble brewing

• PB Ratios work best for asset-heavy businesses like banks and manufacturing; PE Ratios shine for companies with steady earnings

• Neither ratio is perfect – use them together with other metrics and your understanding of the business fundamentals

The ₹200 Mango Dilemma

Picture this: You're at your favourite supermarket, eyeing the plumpest Alphonso mangoes. The vendor is selling them at ₹200 a KG, but you find the same mangoes online for ₹150. How do you know if you're getting a deal or being taken for a ride?

This is exactly the question stock market investors grapple with daily. When Reliance is trading at ₹2,500 and Infosys at ₹1,800, how do you know which one is actually "cheaper"? After all, a lower price doesn't necessarily mean better value – just like that ₹50 mango that turns out to be half-rotten inside.

Enter the world of valuation ratios – specifically, the P/E (Price-to-Earnings) and P/B (Price-to-Book) ratios. These are the investor's magnifying glasses, helping you see beyond the price tag to understand what you're really paying for. Let's decode these ratios in a way that makes sense for us Indian investors.

What is the P/E Ratio? (Or, What Are You Paying for Those Profits?)

The P/E ratio is beautifully simple: it tells you how much money you're shelling out for every rupee of profit a company makes.

The Formula: P/E Ratio = Price per Share ÷ Earnings per Share (EPS)

Think of it like this: You're buying a small chai stall. The stall earns ₹1 lakh profit annually, and the owner wants ₹10 lakhs for it. You're essentially paying 10 times the annual earnings – that's a P/E ratio of 10.

EPS (Earnings Per Share) is simply the company's total profit divided by the number of shares – think of it as your share of the profit pie if you owned one slice (one share) of the company.

Real Example: Let's say Infosys is trading at ₹1,400 per share and its EPS is ₹70. That gives us a P/E ratio of 20 (₹1,400 ÷ ₹70). This means investors are willing to pay ₹20 for every ₹1 of profit Infosys generates.

Decoding the Numbers

• High P/E (say, 30-40 or more): The market is betting on growth. It's like paying a premium for that chai stall because it's next to a new metro station – you're expecting business to boom. Indian IT stocks often have higher P/E ratios because investors expect consistent growth and dollar earnings.

• Low P/E (say, 10-15): This could mean two things – either you've found a bargain (the market is undervaluing the stock), or there's trouble in paradise (declining business, regulatory issues, or industry headwinds). Think of PSU banks that often trade at low P/E ratios.

Warren Buffett once said, "Price is what you pay, value is what you get." A low P/E doesn't automatically mean value – you need to dig deeper.

The Catch

P/E ratios have their blind spots. They don't tell you about future growth potential, can be misleading for cyclical industries (like steel or cement), and are useless for loss-making companies. A startup burning cash to grab market share? P/E won't help you there.

What is the P/B Ratio? (The Asset Reality Check)

If P/E is about profits, P/B is about assets. It compares a stock's price to the company's book value – essentially, what the company owns minus what it owes.

The Formula: P/B Ratio = Price per Share ÷ Book Value per Share

Imagine you're buying a house. The seller wants ₹1 crore, but the property's actual worth (based on land, construction, and resale value) is ₹80 lakhs. You're paying 1.25 times the book value – that's your P/B ratio.

Real Example: HDFC Bank trades at around ₹1,600 per share with a book value of approximately ₹500 per share. That's a P/B of about 3.2. Investors are willing to pay more than three times the bank's net asset value because they believe in its earning power and brand strength.

Reading the Signs

• P/B < 1: The stock is trading below its net assets. On paper, if the company were liquidated tomorrow, you'd theoretically get more than what you paid. This could be a value opportunity or a red flag about the company's future prospects.

• P/B > 1: The market expects the company to generate returns above its asset base. For quality businesses with strong brands (think Asian Paints or Nestle India), this is perfectly normal. You're paying for their ability to convert assets into profits efficiently.

The Limitation

P/B ratios don't capture intangible assets – brand value, patents, proprietary technology, customer loyalty. That's why companies like TCS or Google trade at high P/B ratios. Their real value isn't in their office buildings but in their intellectual capital.

P/E vs P/B: Picking the Right Tool

Just like you wouldn't use a hammer to tighten a screw, you shouldn't use P/E for every company.

Aspect	P/E Ratio	P/B Ratio
Best For	Companies with consistent earnings (IT, FMCG, Pharma)	Asset-heavy businesses (Banks, NBFCs, Real Estate, Manufacturing)
What It Measures	Earnings premium	Asset valuation
Growth Story	Strong indicator of market expectations	Less relevant for high-growth tech companies
Useful When	Comparing peers in the same industry	Company has significant tangible assets

Rule of thumb: Use P/E for Infosys, use P/B for HDFC Bank, and use both (plus other metrics) for a complete picture.

Real-Life Indian Stock Snapshot

Let's look at three companies from different sectors (approximate values for illustration):

Infosys (IT Sector)

• P/E Ratio: ~20

• P/B Ratio: ~7

• Interpretation: Moderate P/E suggests reasonable valuation for a mature IT company. High P/B reflects the intangible value of talent, client relationships, and brand.

HDFC Bank (Banking Sector)

• P/E Ratio: ~19

• P/B Ratio: ~3.2

• Interpretation: For banks, P/B matters more. A P/B above 3 indicates premium valuation, justified by consistently strong ROE (Return on Equity) and asset quality.

Tata Steel (Cyclical Manufacturing)

• P/E Ratio: ~8-12 (varies with steel cycle)

• P/B Ratio: ~1.2

• Interpretation: Low P/E reflects cyclical nature and market uncertainty. P/B close to 1 suggests the market values the company near its asset base – reasonable for a capital-intensive business.

Notice how different sectors have different "normal" ranges? That's why comparing P/E across sectors is like comparing apples to aloo tikki – it just doesn't work.

Key Takeaways: The Wisdom in the Numbers

Peter Lynch, the legendary investor, said, "Know what you own, and know why you own it." Ratios are tools, not crystal balls.

Remember these golden rules:

1. Context is king: A P/E of 30 might be cheap for a high-growth company and expensive for a mature one.

2. Compare apples to apples: Only compare ratios within the same industry and check the industry benchmark for P/E.

3. No ratio stands alone: Use P/E and P/B alongside other metrics like ROE, debt-to-equity, and revenue growth.

4. Understand the business: A company with a low P/E isn't always a bargain – sometimes the market knows something you don't.

5. Time matters: Ratios are snapshots. Look at trends over 3-5 years.

Your Turn: Pick your favorite stock – maybe one you already own or have been watching. Look up its P/E and P/B ratios (you can find these on Screener.in or Moneycontrol). How do they compare to industry peers? Does the valuation surprise you? Share your findings in the comments below – let's decode the market together!