P/E & P/B Ratios
Learn how to calculate and interpret P/E and P/B ratios.
📐 PE & PB Ratios
The Two Most Powerful Lenses for Stock Valuation
Every investor faces the same fundamental question: “Is this stock cheap or expensive?” You can’t answer that by just looking at the share price. A ₹10 stock can be wildly overpriced, while a ₹5,000 stock can be an incredible bargain. The answer lies in valuation ratios — and the two most important ones are the Price-to-Earnings (PE) Ratio and the Price-to-Book (PB) Ratio.
These two ratios are the language of stock valuation. Master them, and you’ll see the market with completely different eyes.
🤔 Why Share Price Alone Means Nothing
The Dangerous Mistake
Most beginners look at a stock’s price and think:
- ₹50 stock = cheap
- ₹5,000 stock = expensive
This is completely wrong.
The Real Question
The real question isn’t “What does the stock cost?”
It’s “What am I getting for what I’m paying?”
Analogy: The Property Test
Imagine two flats:
- Flat A: ₹20 lakh in a village. Rental income: ₹5,000/month
- Flat B: ₹80 lakh in Mumbai. Rental income: ₹60,000/month
Which is a better deal?
Flat B earns ₹7.2 lakh/year → recovered in ~11 years
Flat A earns ₹60,000/year → recovered in ~33 years
Flat B at ₹80 lakh is cheaper than Flat A at ₹20 lakh — in terms of what you get for what you pay!
Stock valuation works exactly the same way. Ratios tell you what you’re getting for every rupee you invest.
📊 PART 1: Price-to-Earnings (PE) Ratio
What is the PE Ratio?
Definition
The PE Ratio (also called the P/E Ratio or Price-Earnings Multiple) tells you how much you’re paying for every ₹1 of a company’s earnings.
PE Ratio = Market Price Per Share / Earnings Per Share (EPS)Or equivalently:
PE Ratio = Total Market Capitalization / Total Net ProfitBreaking It Down
Market Price: What the stock trades at today
Earnings Per Share (EPS): Net profit divided by total shares outstanding
EPS = Net Profit / Total Shares Outstanding
Example:
Net Profit = ₹1,000 crore
Shares Outstanding = 100 crore
EPS = ₹1,000 crore / 100 crore = ₹10 per shareSimple Example
Company ABC:
- Share Price: ₹200
- EPS: ₹10
PE = ₹200 / ₹10 = 20xWhat does PE = 20 mean?
You are paying ₹20 for every ₹1 of earnings.
Or another way to think about it:
At current earnings, it would take 20 years for the company to earn back your investment price (assuming no growth).
🧮 Calculating PE Ratio: Step by Step
Example: Infosys
| Metric | Value |
|---|---|
| Current Share Price | ₹1,800 |
| Net Profit (Annual) | ₹24,000 crore |
| Shares Outstanding | 400 crore |
| EPS | ₹24,000 / 400 = ₹60 |
| PE Ratio | ₹1,800 / ₹60 = 30x |
Reading: You are paying ₹30 for every ₹1 of Infosys’s annual earnings.
🔀 Types of PE Ratio
1. Trailing PE (TTM PE) — Most Common
Uses the last 12 months’ actual earnings (Trailing Twelve Months).
Trailing PE = Current Price / EPS of last 12 months✅ Based on real, reported numbers
❌ Looks backward — doesn’t capture future growth
When to use: Quick assessment, comparing current vs historical
2. Forward PE
Uses projected earnings for the next 12 months.
Forward PE = Current Price / Expected EPS for next year✅ More relevant for valuation — markets are forward-looking
❌ Depends on analyst estimates — can be wrong
When to use: Growth companies, when earnings trajectory matters
Example:
- Stock price: ₹500
- Current EPS (TTM): ₹20 → Trailing PE = 25x
- Estimated EPS next year: ₹28 → Forward PE = 17.9x
The forward PE of 17.9x looks cheaper — reflecting expected earnings growth.
3. Shiller PE (CAPE — Cyclically Adjusted PE)
Uses 10-year average earnings adjusted for inflation.
CAPE = Current Price / Average of 10 years' inflation-adjusted EPS✅ Removes economic cycle distortions
✅ Better for long-term market valuation assessment
❌ Not useful for individual stock analysis
Used mainly for: Market-level (index) valuation assessment
Created by: Nobel Prize winner Robert Shiller
4. PEG Ratio (PE to Growth)
Adjusts PE for the company’s earnings growth rate.
PEG = PE Ratio / Annual EPS Growth Rate (%)
Example:
PE = 30x
EPS Growth Rate = 30% per year
PEG = 30 / 30 = 1.0Interpreting PEG:
| PEG Value | Interpretation |
|---|---|
| < 0.5 | Potentially very undervalued |
| 0.5 - 1.0 | Undervalued relative to growth |
| 1.0 | Fairly valued (PE = Growth rate) |
| 1.0 - 2.0 | Slightly expensive |
| > 2.0 | Expensive relative to growth |
Why PEG is powerful:
A company with PE = 40x and growth of 40% (PEG = 1.0) may be cheaper than a company with PE = 15x and growth of 5% (PEG = 3.0).
📖 How to Read PE Ratio
The Basic Framework
| PE Range | General Interpretation |
|---|---|
| < 10x | Very low — possibly undervalued or in trouble |
| 10x - 15x | Low — value territory |
| 15x - 20x | Fair — moderate valuation |
| 20x - 25x | Slightly elevated |
| 25x - 35x | High — growth expectations priced in |
| 35x - 50x | Very high — strong growth needed to justify |
| > 50x | Extreme — speculation or exceptional growth story |
⚠️ Warning: These are general guidelines. PE must always be interpreted in context — sector, growth, market conditions, and historical average all matter.
🏭 PE Ratios Vary by Sector
Why Different Sectors Have Different PE Norms
Not all businesses are equal. Some grow fast, some grow slow, some are cyclical. The market prices them differently.
Typical PE Ranges by Sector (India, indicative)
| Sector | Typical PE Range | Reason |
|---|---|---|
| IT Services | 25x - 40x | High margins, steady growth, cash-rich |
| FMCG | 40x - 70x | Pricing power, consistent demand, premiumization |
| Private Banks | 15x - 25x | Regulated, moderate growth, NPA risks |
| PSU Banks | 6x - 12x | Lower growth, governance concerns |
| Pharma | 20x - 35x | R&D optionality, regulatory risks |
| Automobiles | 12x - 25x | Cyclical, capex-heavy |
| Real Estate | 20x - 40x | Asset-light models command premium |
| Infrastructure | 15x - 30x | Long gestation, government-dependent |
| Oil & Gas (PSU) | 6x - 12x | Government pricing, commodity risk |
| Consumer Discretionary | 30x - 60x | Growth potential, aspirational brands |
| Utilities | 10x - 18x | Stable but slow growth |
| Metals & Mining | 6x - 15x | Highly cyclical |
Key Insight: Comparing PE across sectors is like comparing apples and oranges. Always compare within the same sector.
📈 NIFTY 50 PE: The Market Thermometer
Historical NIFTY 50 PE Ranges
The PE ratio of NIFTY 50 tells you whether the overall market is cheap or expensive.
Historical NIFTY 50 PE Zones:
─────────────────────────────────────────────
< 15x │ Very Cheap │ Rare — Buy Aggressively
15-18x │ Cheap │ Good buying opportunity
18-22x │ Fair Value │ Normal market conditions
22-25x │ Expensive │ Cautious buying
25-30x │ Overvalued │ Book some profits
> 30x │ Bubble Zone │ High caution — reduce exposure
─────────────────────────────────────────────Key Historical Events and PE Levels
| Period | NIFTY PE | What Happened |
|---|---|---|
| 2003 (Post dotcom crash) | ~10x | Generational buying opportunity |
| 2007 (Bull market peak) | ~28x | Market at euphoria |
| 2008 (Global Financial Crisis low) | ~11x | Fear-driven crash |
| 2014 (Modi election rally) | ~18x | Political stability premium |
| 2020 March (COVID crash) | ~17x | Panic selling — great entry |
| 2021 (Post-COVID rally) | ~40x | Stimulus-driven excess |
| 2024 | ~22-24x | Moderately valued |
The PE Pendulum
Markets swing between FEAR and GREED
FEAR (Low PE, ~10-15x) GREED (High PE, ~30-40x)
"Everything is terrible" "Sky is the limit"
Stocks are cheap, nobody wants them Stocks are expensive, everyone wants them
←─────────────── Pendulum ───────────────→
BEST TIME TO BUY BEST TIME TO SELLWarren Buffett’s principle: “Be fearful when others are greedy and greedy when others are fearful.”
⚙️ What Affects the PE Ratio?
Factors that Push PE Higher
📈 High earnings growth: Fast-growing companies justify higher PE
📈 Strong brand and pricing power: Consistent profitability premium
📈 Low interest rates: Cheap money flows into equities
📈 Sector tailwinds: Industry on the rise
📈 Quality of management: Trust = premium valuation
📈 Foreign investor interest: FPI inflows inflate PE
📈 Bull market sentiment: Rising tide lifts all PEs
Factors that Pull PE Lower
📉 Slow earnings growth: Less reason to pay premium
📉 High debt: Financial risk reduces multiple
📉 Cyclical industry: Earnings volatile = lower PE
📉 Rising interest rates: Fixed income competes with equity
📉 Governance issues: Trust deficit = discount
📉 Regulatory risks: Uncertain earnings = lower multiple
📉 Bear market: Compressed multiples across the board
🚨 PE Ratio Limitations: When PE Can Mislead
1. Negative Earnings
If a company has losses (negative EPS), PE is meaningless or negative.
Solution: Use EV/EBITDA, Price/Sales, or Price/Cash Flow instead.
2. Earnings Can Be Manipulated
Accounting choices can inflate or deflate reported earnings:
- Depreciation methods
- Revenue recognition timing
- One-time gains/losses
- Provisions and write-offs
Solution: Look at operating cash flow, not just reported profits.
3. Cyclical Companies
For cyclical businesses (metals, construction, shipping), PE is lowest at the peak (high earnings) and highest at the trough (low earnings) — completely counterintuitive!
Tata Steel in boom: EPS = ₹100, Price = ₹800, PE = 8x (looks cheap!)
Tata Steel in bust: EPS = ₹10, Price = ₹400, PE = 40x (looks expensive!)
Reality: The low PE at boom is the SELLING signal
The high PE at bust is the BUYING signal!Solution: Use normalised earnings or EV/EBITDA for cyclicals.
4. High PE ≠ Always Expensive
Sometimes high PE is justified:
Company A: PE = 15x, Growth = 5% per year
Company B: PE = 35x, Growth = 35% per year
In 3 years:
Company A EPS: ₹10 → ₹11.6 (5% CAGR)
Company B EPS: ₹10 → ₹20.4 (35% CAGR)
Company B's PE drops rapidly as earnings grow!
What seems expensive today may be cheap tomorrow.5. Sector Context is Everything
A PE of 12x for an IT company is dirt cheap. A PE of 12x for a PSU bank is fair. Context always matters.
🧠 PE in Practice: The Art of Application
Step 1: Know the Historical Average
Research the company’s own historical PE range:
- Was it always 20-25x?
- Is current PE of 30x above average? Why?
- Was there a structural reason for rerating?
Step 2: Compare with Peers
- Compare Infosys PE with TCS, HCL, Wipro
- A company trading at discount to peers may be undervalued
- Or may have a legitimate reason for discount
Step 3: Understand the Growth
- Is the PE justified by the growth rate?
- Calculate forward PE with reasonable estimates
- Use PEG to account for growth
Step 4: Factor in the Cycle
- Is the company at peak or trough earnings?
- Normalise for one-time items
- Look at 3-5 year average earnings
Step 5: Check Market PE
- If market PE is 22x, a stock at 22x is “market-priced”
- At 15x, it trades at a discount — why?
- At 35x, it trades at a premium — is it justified?
📚 PART 2: Price-to-Book (PB) Ratio
What is the PB Ratio?
Definition
The PB Ratio (Price-to-Book Value Ratio) tells you how much you’re paying for every ₹1 of a company’s net assets (book value).
PB Ratio = Market Price Per Share / Book Value Per Share
Or equivalently:
PB Ratio = Total Market Capitalization / Total Book Value (Net Worth)What is Book Value?
Book Value = Total Assets − Total Liabilities
It’s also called Net Worth or Shareholders’ Equity.
Think of it as the accounting value of what shareholders own.
Company's Balance Sheet:
─────────────────────────────────
Total Assets = ₹10,000 crore
Total Liabilities = ₹6,000 crore
─────────────────────────────────
Book Value (Net Worth) = ₹4,000 crore
─────────────────────────────────
Shares Outstanding = 400 crore
Book Value Per Share = ₹4,000 / 400 = ₹10 per share🧮 Calculating PB Ratio: Step by Step
Example: HDFC Bank
| Metric | Value |
|---|---|
| Current Share Price | ₹1,700 |
| Total Assets | ₹35,00,000 crore |
| Total Liabilities | ₹32,00,000 crore |
| Book Value (Net Worth) | ₹3,00,000 crore |
| Shares Outstanding | 740 crore |
| Book Value Per Share | ₹3,00,000 / 740 = ₹405 |
| PB Ratio | ₹1,700 / ₹405 = ~4.2x |
Reading: You are paying ₹4.20 for every ₹1 of HDFC Bank’s net assets.
📖 How to Read PB Ratio
The Basic Framework
| PB Range | General Interpretation |
|---|---|
| < 1x | Trading below book value — possibly undervalued or in trouble |
| 1x - 1.5x | Low — value territory |
| 1.5x - 3x | Moderate — reasonable for quality companies |
| 3x - 5x | High — strong brand or earnings power |
| 5x - 10x | Very high — asset-light business with strong moat |
| > 10x | Extreme — significant intangible value or overvaluation |
The Magic of PB = 1x
PB = 1x means: Market price equals book value.
You’re essentially paying exactly what the company’s assets are worth on paper.
Below 1x (PB < 1):
Market is valuing the company LESS than its assets.
Either a deep value opportunity or the market knows something is wrong.
Above 1x (PB > 1):
Market is paying a PREMIUM above asset value.
The premium represents: Brand, goodwill, future earnings, competitive moat.🏦 Why PB Ratio is CRUCIAL for Banks
Banks Are Special
For banking and financial companies, PB ratio is the primary valuation metric — more important than PE.
Why?
Banks are essentially in the business of deploying capital (assets) to earn returns. Their balance sheet IS the business.
A bank's quality = Quality of its loan book (assets)
A bank's value = What those assets are worth
PB ratio = What market thinks those assets are worthInterpreting Bank PB Ratios
| Bank Type | Typical PB Range | Reason |
|---|---|---|
| Premium Private Banks (HDFC Bank, Kotak) | 3x - 5x | Best quality, strong management, high ROE |
| Good Private Banks (Axis, ICICI) | 2x - 3.5x | Good quality, improving ROE |
| Average Private Banks | 1x - 2x | Average asset quality |
| PSU Banks (SBI) | 1x - 2x | Government backing, lower ROE |
| Weak PSU Banks | 0.5x - 1x | Poor asset quality, NPAs |
Return on Equity (ROE) Drives PB
The key relationship:
Higher ROE → Higher PB (justified)
Lower ROE → Lower PBWhy?
If a bank earns 20% ROE (Return on Equity), it’s generating high returns on its book value → Market pays a premium → High PB.
If a bank earns 8% ROE, it barely justifies its book → Market pays little premium → Low PB.
The formula:
Justified PB = ROE / Cost of Equity
Example:
ROE = 18%, Cost of Equity = 12%
Justified PB = 18 / 12 = 1.5x🏭 PB Ratio by Sector
Typical PB Ranges in India
| Sector | Typical PB Range | Reason |
|---|---|---|
| IT Services | 6x - 15x | Asset-light, high ROE, intangibles |
| FMCG | 8x - 20x | Brands are huge intangible assets |
| Private Banks | 2x - 5x | Asset quality premium |
| PSU Banks | 0.7x - 1.5x | Government owned, lower ROE |
| Pharma | 3x - 7x | R&D, brand value |
| Auto | 2x - 5x | Asset-heavy but strong brands |
| Steel/Metals | 0.8x - 2x | Commodity, cyclical |
| Real Estate | 1x - 4x | Assets revalued by market |
| Infrastructure | 1x - 3x | Heavy assets, moderate returns |
| Insurance | 3x - 6x | Embedded value + growth |
| Consumer Durables | 5x - 12x | Brand premium |
Why IT Companies Have Very High PB
IT companies have very few tangible assets — their main assets are people and intellectual property (which don’t fully show on the balance sheet).
Infosys Assets:
Physical Assets (computers, buildings): Small
Human Capital (100,000+ engineers): NOT on balance sheet!
Brand and client relationships: NOT on balance sheet!
Book Value = Only tangible assets
Market Cap = All assets (including intangibles)
PB = Very high because intangibles are huge but not counted🔗 The Relationship Between PE and PB
The Bridge Formula
PB = PE × ROE
Where ROE = Net Profit / Shareholders' EquityThis means:
- A company with high ROE will naturally have a high PB even at same PE
- A company with low ROE will have a low PB
Understanding with Example
Company A:
- PE = 20x
- ROE = 20%
- PB = 20 × 0.20 = 4x
Company B:
- PE = 20x
- ROE = 10%
- PB = 20 × 0.10 = 2x
Both have same PE, but Company A deserves higher PB because it generates better returns from its assets.
📊 NIFTY 50 PB: Another Market Thermometer
Historical NIFTY 50 PB Ranges
| PB Level | Market Signal |
|---|---|
| < 2x | Deeply undervalued — rare, strong buy |
| 2x - 3x | Undervalued to fairly valued |
| 3x - 4x | Fair value zone |
| 4x - 5x | Moderately expensive |
| > 5x | Expensive |
Key Historical Levels
| Event | NIFTY PB |
|---|---|
| 2008 Crisis Low | ~1.6x |
| 2020 COVID Low | ~2.3x |
| 2021 Post-COVID Peak | ~4.8x |
| Historical Average | ~3x - 3.5x |
🚨 PB Ratio Limitations: When It Can Mislead
1. Intangible Assets Ignored
Book value doesn’t count:
- Brand value (HUL’s brand worth billions — not on balance sheet)
- Patents and intellectual property
- Customer relationships
- Human capital
- Software and data assets
This makes PB misleading for asset-light, brand-heavy companies.
2. Asset Quality Matters
A PB of 0.8x can mean two very different things:
Scenario A: Book value = ₹100/share (good quality assets)
Price = ₹80 → Deep value opportunity!
Scenario B: Book value = ₹100/share (but loans are turning bad)
True value of assets = ₹60/share
Price = ₹80 → Actually EXPENSIVE at 0.8x PB!For banks, always check NPA (Non-Performing Assets) ratios before concluding cheap PB = good deal.
3. Asset-Light Businesses Have No Anchor
For pure technology, consulting, or service companies, book value is very small. PB becomes almost irrelevant as a standalone metric.
4. Accounting Differences
Different depreciation rates, asset revaluation policies, and provisioning norms affect book value significantly.
🧠 PB in Practice: When to Use It
Best Uses of PB
✅ Banking & Financial Services: Primary valuation metric
✅ Capital-intensive industries: Steel, cement, auto, power
✅ Real estate: Land and building assets are core
✅ Value investing screen: Filtering stocks below book value
✅ Market-level assessment: NIFTY PB vs historical average
When Not to Rely on PB
❌ IT and tech companies: Assets are mostly intangible
❌ FMCG with strong brands: Brand isn’t in book value
❌ Startup or high-growth companies: Book value doesn’t reflect growth
❌ Companies with significant goodwill: May distort book value
⚖️ PART 3: Using PE and PB Together
The Combined Framework
Neither PE nor PB alone tells the full story. Together, they create a more complete picture.
The Four Quadrants
HIGH PB
│
Overvalued │ Growth Premium
(Expensive & │ (Expensive but
Low Returns) │ High Returns)
│
LOW PE ────────────────┼──────────────────── HIGH PE
│
Deep Value │ Value Trap Risk
(Cheap & │ (Cheap but
Low Returns) │ Low Returns)
│
LOW PBInterpreting the Quadrants
Top Right (High PE + High PB):
- Growth companies with strong ROE
- Market paying premium for quality
- Not necessarily overvalued if growth justifies it
- Examples: TCS, Asian Paints, HUL
Top Left (Low PE + High PB):
- Unusual combination — rare
- High asset value but suppressed earnings
- Could be a turnaround story
Bottom Left (Low PE + Low PB):
- Classic value territory
- Deep value if assets and earnings are real
- Examples: PSU banks at certain times, cyclical stocks at trough
Bottom Right (High PE + Low PB):
- Asset-light growth companies burning cash
- Loss-making high-growth companies
- Needs careful analysis — growth story must play out
🔍 Real-World Comparison: Indian Stocks
IT Sector Example
| Company | Approx PE | Approx PB | ROE | Interpretation |
|---|---|---|---|---|
| TCS | 28-32x | 12-15x | 45%+ | Premium justified by ROE and consistency |
| Infosys | 22-27x | 8-10x | 30%+ | Quality at slight discount to TCS |
| Wipro | 18-22x | 4-6x | 15-18% | Lower multiple due to lower ROE |
| HCL Tech | 20-24x | 6-8x | 22-25% | Mid-tier premium |
Banking Sector Example
| Company | Approx PE | Approx PB | ROE | Interpretation |
|---|---|---|---|---|
| HDFC Bank | 18-22x | 3.5-4.5x | 17-18% | Premium private bank |
| ICICI Bank | 16-20x | 3-4x | 17-18% | Improving, approaching HDFC |
| Axis Bank | 14-18x | 2-3x | 14-16% | Good but discount to top banks |
| SBI | 10-14x | 1.5-2x | 14-16% | PSU discount but improving |
| Punjab National Bank | 7-12x | 0.8-1.2x | 8-10% | Weak PSU, low ROE |
Numbers are illustrative and approximate — always check current values
📏 Valuation Matrix: Quick Reference
What to Look For
| Situation | PE Signal | PB Signal | Action |
|---|---|---|---|
| Market crash | PE < 15x | PB < 2.5x | Consider aggressive buying |
| Fair value | PE 18-22x | PB 3-3.5x | Normal SIP, selective buying |
| Expensive | PE > 25x | PB > 4.5x | Cautious, selective, book partial profits |
| Bubble | PE > 35x | PB > 6x | High caution, avoid new investments |
🧰 Tools to Find PE & PB Ratios
Free Tools for Indian Investors
1. Screener.in
- Most comprehensive free tool
- Historical PE and PB charts
- Peer comparison
- Export data to Excel
- Ideal for fundamental analysis
2. NSE Website (nseindia.com)
- Official PE data for indices
- Free and reliable
- Real-time index PE/PB on homepage
3. Moneycontrol
- Individual stock PE and PB
- Sector averages
- Historical charts
- Mobile app available
4. Tickertape.in
- Visual PE/PB analysis
- Comparison tools
- Screener features
- User-friendly interface
5. BSE India (bseindia.com)
- Official BSE data
- Market statistics including PE
6. Trendlyne
- Advanced screening
- PE percentile (where does current PE stand vs history)
- Valuation grades
7. Broker Platforms (Zerodha Kite, Groww, etc.)
- Quick PE/PB data on stock pages
- Basic valuation metrics
🎯 Practical Strategies Using PE and PB
Strategy 1: Historical PE Band Analysis
Every stock oscillates within a PE range over time.
TCS Historical PE Range: 18x - 32x
Current PE: 20x
→ Near lower end of historical range
→ Potentially undervalued relative to own history
→ Consider buying (if fundamentals intact)How to use:
- Find stock’s 5-10 year PE range on Screener.in
- Compare current PE to historical range
- If near lower band → potential opportunity
- If near upper band → be cautious
Strategy 2: Mean Reversion
PE ratios tend to revert to their mean (average) over time.
If average PE of a sector = 20x
Current PE = 12x (below average)
→ Likely to mean-revert upward → Buy opportunity
If current PE = 35x (above average)
→ Likely to mean-revert downward → CautionStrategy 3: Ben Graham’s Classic Screen
Benjamin Graham’s Value Investing criteria:
- PE < 15x (or PE × PB < 22.5)
- PB < 1.5x
- Dividend yield > 2/3 of AAA bond yield
- Stable earnings for 10+ years
This is very conservative — few companies pass this in modern bull markets.
Strategy 4: Quality at Reasonable Price (QARP)
A more practical modern approach:
✅ ROE consistently > 15%
✅ Debt-to-Equity < 1x
✅ Earnings growth > 15% CAGR
✅ PE < 1.5x the growth rate (PEG < 1.5)
✅ PB supported by ROE
Strategy 5: Index PE for Market Timing
Use NIFTY 50 PE to guide overall market exposure:
NIFTY PE < 18x → Increase equity allocation (buy more)
NIFTY PE 18-22x → Maintain normal allocation
NIFTY PE 22-27x → Slightly cautious, selective buying
NIFTY PE > 27x → Reduce equity, increase cash/debt allocationNot a perfect system — markets can stay expensive for years. But helps in extreme situations.
📊 Quick Calculation Practice
Practice Question 1
Company Details:
- Share Price: ₹450
- Net Profit: ₹900 crore
- Shares Outstanding: 60 crore
- Net Worth: ₹2,400 crore
Calculate PE and PB:
EPS = ₹900 crore / 60 crore = ₹15 per share
PE = ₹450 / ₹15 = 30x
Book Value Per Share = ₹2,400 crore / 60 crore = ₹40 per share
PB = ₹450 / ₹40 = 11.25x
ROE = Net Profit / Net Worth = ₹900 / ₹2,400 = 37.5%
PEG Check = PE / Growth rate (need growth rate to complete)Interpretation: High PE (30x) + High PB (11.25x) + High ROE (37.5%) = Growth company with strong returns. Is it overvalued? Depends on growth rate — if growing earnings at 30%+, PE of 30x is reasonable.
Practice Question 2
Bank Details:
- Share Price: ₹85
- Book Value Per Share: ₹110
- Net Profit: ₹500 crore
- Shares: 100 crore
EPS = ₹500 / 100 = ₹5
PE = ₹85 / ₹5 = 17x
PB = ₹85 / ₹110 = 0.77x (below book value!)
ROE = ₹500 / (₹110 × 100 crore) = 4.5% (very low!)Interpretation: Trading below book (PB < 1) seems cheap. But ROE of 4.5% is terrible — explains the discount. Market doesn’t trust the book value (possibly bad loans). Not necessarily a buy just because PB < 1.
🌍 Global PE Comparison
Major Market PE Ratios (Approximate 2024)
| Market | PE Range | Notes |
|---|---|---|
| USA (S&P 500) | 22x - 28x | Historically expensive, tech-heavy |
| India (NIFTY 50) | 20x - 25x | Growth premium, fair to slightly expensive |
| China (CSI 300) | 12x - 16x | Beaten down, regulatory risks |
| Europe (Euro Stoxx) | 13x - 17x | Slow growth, value territory |
| Japan (Nikkei) | 16x - 22x | Governance reforms driving rerating |
| UK (FTSE 100) | 10x - 14x | Value market, energy/finance heavy |
| Emerging Markets | 12x - 16x | Discount to developed markets |
| Brazil | 8x - 12x | Political risk discount |
Key Insight: India trades at a premium to most emerging markets and even some developed markets — reflecting:
- Higher GDP growth expectations
- Young demographic dividend
- Strong corporate governance improvement
- Digital economy growth story
The India Premium: Investors globally are willing to pay more for Indian earnings because of growth visibility.
🎓 Common Mistakes to Avoid
Mistake 1: Buying Low PE Without Checking Why
❌ “PE is only 6x — must be cheap!”
✅ Ask WHY the PE is low — is it distress, cyclicality, or genuine undervaluation?
Mistake 2: Avoiding High PE Companies Always
❌ “PE is 50x — too expensive, I’ll pass.”
✅ High-growth companies deserve high PE. Check PEG and growth trajectory.
Mistake 3: Using PE for Loss-Making Companies
❌ Calculating PE for a startup with negative earnings.
✅ Use Price/Sales or EV/Revenue for loss-making companies instead.
Mistake 4: Ignoring Cyclicality
❌ Buying a steel company at low PE (peak earnings) thinking it’s cheap.
✅ For cyclicals, low PE often signals peak — use normalised earnings.
Mistake 5: Not Comparing to Sector
❌ Saying Infosys at 28x PE is expensive (without sector context).
✅ IT sector PE average is 25-30x — Infosys at 28x is fairly valued.
Mistake 6: Using PB Alone for Asset-Light Companies
❌ HUL PB = 60x — must be massively overpriced!
✅ HUL’s brand, distribution, and pricing power aren’t in book value. High PB is expected.
Mistake 7: Ignoring Quality Differences
❌ “Company A PE = 15x, Company B PE = 15x — both equally valued.”
✅ If Company A has ROE 25% and Company B has ROE 8%, they’re NOT equally valued.
🌟 Key Takeaways
✨ PE ratio tells you what you pay per ₹1 of earnings — the most used valuation metric
✨ PB ratio tells you what you pay per ₹1 of net assets — crucial for banks
✨ Neither PE nor PB means anything without context — sector, growth, quality all matter
✨ High PE ≠ overvalued — fast-growing quality companies deserve premium PE
✨ PB < 1 ≠ always cheap — check why assets are marked down
✨ PEG ratio adjusts PE for growth — PEG < 1 is sweet spot
✨ ROE connects PE and PB — PB = PE × ROE
✨ NIFTY PE and PB are powerful tools to gauge overall market valuation
✨ Cyclical companies need special treatment — standard PE interpretation reverses
✨ Use both PE and PB together for a complete valuation picture
🎯 Action Steps
- Check NIFTY 50 PE and PB on NSE website today — understand where the market stands
- Pick 5 stocks you own and find their current PE and PB on Screener.in
- Compare each stock’s current PE with its 5-year historical average
- Calculate PEG for your growth stocks — is growth justifying the PE?
- For any banking stock, always check PB alongside ROE before investing
- Set up PE alerts on Tickertape or Screener for stocks on your watchlist
- Track NIFTY PE monthly — note when it’s at extremes and how markets behaved
“Price is what you pay. Value is what you get.”
— Warren Buffett
“In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
— Benjamin Graham (PE and PB are the scales)
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
— Warren Buffett (Why high PE quality stocks can still be great buys)
📐 PE and PB are not just numbers — they are the language in which Mr. Market speaks.
Learn this language, and the stock market transforms from a casino into a store — where occasionally, wonderful things go on sale.
⚠️ DISCLAIMER: Wealth Kite is an Educational Resource. Not a SEBI Registered Investment Advisor. Investments in securities market are subject to market risks.