Why this old-school metric still works when markets get noisy

Most investors today focus on the P/E ratio — the price-to-earnings multiple. It looks simple and powerful. But when company profits jump or fall sharply, this number can often mislead.

That’s why the Price-to-Book (P/B) ratio deserves another look. It’s an underrated but powerful way to value businesses — especially in uncertain times.

1. What is the Price-to-Book Ratio?

The P/B ratio shows how much investors are paying for each rupee of a company’s net worth.
It’s calculated as:

P/B = Market Price per Share ÷ Book Value per Share

Book value (or net worth) changes slowly because it’s built over time through retained earnings. That’s why P/B gives a more stable view of a company’s value than P/E, which can swing with short-term profit changes.

2. Why P/B Can Be More Reliable Than P/E

Let’s take an example.

A company earns ₹10 per share and trades at ₹100. Its P/E is 10.
If profits fall by half to ₹5, and the price also falls to ₹50, the P/E is still 10 — even though the business has clearly weakened.

P/E hides that reality.

P/B avoids this distortion because it’s based on net worth, not earnings.
During Covid, for example, profits crashed but book values stayed largely steady. Market P/B ratios fell below 2x, and those periods turned out to be excellent buying opportunities.

3. How to Use P/B Smartly

Here’s a simple 5-step framework:

1️⃣ Start with ROE (Return on Equity)
Check how efficiently the company earns profits on its net worth. A stable or rising ROE over 10+ years usually means a quality business.

2️⃣ Connect ROE with fair P/B
A company with 15% ROE often justifies a P/B around 3x. Higher ROE can justify more, but it’s not a straight line — the market rewards consistency, not just spikes.

3️⃣ Estimate future ROE for loss-makers
If a company isn’t profitable yet, project when it could reach a sustainable ROE (say 20% by 2030) and discount that back to today.

4️⃣ Hunt for anomalies
Good companies sometimes face short-term issues. When their P/B drops below their historical range, it can be a smart entry point.

5️⃣ Track the market’s P/B band
Historically, the Indian market trades between 2x and 4x book value.
Above 4x, future returns tend to be lower; below 2x, opportunities often emerge.

4. What You Should Remember

• ROE drives P/B: higher and sustainable ROE deserves higher P/B.
• Extreme ROEs never last forever: always assume they will normalize.
• Book value must be accurate: use adjusted net worth when valuing financials or companies with large revaluations.

5. The Bottom Line

The P/B ratio might seem old-fashioned in today’s fast-moving markets, but it often gives the most grounded view of value.
It focuses on what the company has built — not just what it earned last quarter.

In a world driven by short-term noise, Price-to-Book helps long-term investors stay focused on what truly matters — the strength of the balance sheet, and the business’s ability to keep earning solid returns on it.