PE Ratio and PB Ratio

The cover story in a recent issue gave me good insights into the current situation of the Indian stock market. I wanted to understand the difference between PE ratio and PB ratio, which you have used to analyse the current market situation.

- Ritika J 

Editor Responds: We appreciate your kind words of encouragement. The PE (price-to-earnings) ratio and PB (price-to-book) ratio are both key financial metrics used in stock analysis, but they measure different aspects of a company’s financial health. The PE ratio compares a company’s stock price to its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of the company’s earnings. A higher PE ratio suggests that investors are willing to pay more for future earnings’ potential, potentially indicating optimism about the company’s growth prospects.

In contrast, the PB ratio compares a company’s stock price to its book value per share, which is essentially the net asset value. It reflects the difference between a company’s total assets and total liabilities. A lower PB ratio may indicate that the stock is undervalued, as investors are paying less relative to the company’s net assets. In summary, while the PE ratio focuses on earnings, the PB ratio emphasises the company’s asset value, and they serve different purposes in evaluating stocks. Keep writing to us.