P/E or P/B Ratio? 5 Scenarios That Tell You Which Ratio to Use

So you’re evaluating two companies: one is a profitable software giant, and the other is a traditional bank with massive tangible assets. You want to invest—but which financial ratio should you trust more. P/E or P/B Ratio? choosing Price to Earnings (P/E) or Price to Book (P/B) ratio is a common dilemma for investors. Both P/E and P/B are powerful tools, but using the wrong one in the wrong context can lead to poor investment decisions. In this article delight, we’ll walk you through 5 real-world scenarios that clearly show when to rely on P/E and when P/B makes more sense.

What is the P/E Ratio?

The Price to Earnings (P/E) Ratio shows how much investors are willing to pay for each ₹1 of a company’s earnings.

P/E = Market Price per Share ÷ Earnings per Share (EPS)

Think of buying a business that earns ₹1 lakh a year. If someone asks ₹10 lakh for it:

• You’re paying 10 times the earnings.
• P/E = 10.

If the price is ₹5 lakh, P/E = 5. Cheaper, right?

So:

• High P/E = Expensive compared to earnings (market expects future growth).
• Low P/E = Cheaper, possibly undervalued (or risky).

What is the P/B Ratio?

The Price to Book (P/B) Ratio shows how much investors are willing to pay for each ₹1 of the company’s book value (net assets).

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

Suppose you’re buying a house:

• Its resale value (book value) is ₹50 lakh.
• The owner is asking ₹75 lakh (market price).
• You’re paying 1.5 times the value of the assets.
• P/B = 1.5

If the house is listed at ₹40 lakh:

• P/B = 0.8 → It’s selling for less than its asset value.

So:

• P/B > 1 = Market believes the company will grow or assets are worth more.
• P/B < 1 = Company may be undervalued or in trouble.

P/E vs P/B Ratio: 5 Scenarios That Tell You Which Ratio to Use

Scenario 1: Profitable Tech Companies with High Growth

Example: Apple, Microsoft, Infosys
These companies have strong and stable earnings, often reinvested for growth.

• Use: ✔️ P/E Ratio
• Why: You’re paying for future growth, not physical assets. Investors want to know how expensive the profits are.

🔍 Tip: Compare with industry P/E averages to avoid overpaying.

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Scenario 2: Asset-Heavy Businesses like Banks or Real Estate

Example: HDFC Bank, LIC, DLF
These firms hold large physical or financial assets.

• Use: ✔️ P/B Ratio
• Why: Book value reflects the tangible worth of the business. Earnings may be volatile, but assets are key.

🔍 Tip: A P/B < 1 may suggest undervaluation—or deeper trouble. Dig deeper.

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Scenario 3: Loss-Making Startups or Turnaround Stocks

Example: Zomato, Paytm, Jet Airways (in revival)
These firms may have high potential but no current earnings.

• Use: ✔️ P/B Ratio
• Why: P/E is meaningless if earnings are zero or negative. Book value tells you what’s left if the business collapses.

🔍 Tip: Look for low debt and strong assets on the balance sheet.

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Scenario 4: Cyclical Industries with Fluctuating Earnings

Example: Tata Steel, ONGC, cement companies
These companies have earnings that vary based on commodity prices or demand cycles.

• Use: ✔️ P/B Ratio
• Why: A single-year P/E may mislead due to peak or trough earnings. P/B smooths this volatility.

🔍 Tip: Use average P/E over 5-10 years if still comparing earnings.

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Scenario 5: Comparing Similar Companies Within an Industry

Example: Two auto manufacturers or two private banks
You’re trying to decide which one is more attractive to invest in.

• Use: ✔️ Both P/E and P/B Ratios
• Why: When comparing apples to apples, both ratios can reveal who’s priced more attractively in terms of profits and assets.

🔍 Tip: Also consider ROE (Return on Equity) alongside these ratios for sharper insights.

When to Use Which : P/E or P/B Ratio?

Scenario	Use P/E Ratio	Use P/B Ratio
Mature, profitable companies	✔️	✅ (less common)
Asset-heavy industries (banks, real estate, manufacturing)	❌ (less relevant)	✔️
Startups or companies with no or negative earnings	❌	✔️
Assessing market expectations on profits	✔️	❌
Looking for value based on net assets	❌	✔️
Comparing companies within same industry	✔️	✔️ (especially for financials)

Final Takeaway | P/E or P/B Ratio?

In the world of investing, numbers speak louder than hype. But only when you listen to the right ones ! The P/E Ratio and P/B Ratio are not competitors; they’re companions. Each serves a purpose depending on the nature of the business and its financial health. By understanding the logic behind these ratios and applying them in the right context, you move from being a speculative trader to a thoughtful investor. So, the next time you analyze a stock, pause and ask: Am I pricing the earnings or the essence? Smart investing begins with smart questions. Keep asking, keep learning.

Further insights, read Value Investing: From Graham to Buffett https://amzn.to/45i8k6p

Read also : ROE vs ROCE | Key Metrics Every Investor Must Know https://thebrightdelights.com/roe-vs-roce/

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