P/E vs P/B Ratio: Which One Should You Use for Indian Stocks?

A simple guide with TCS and HDFC Bank examples, for beginners and Indian stock market investors

One friend says, “TCS is cheap, its P/E is only 17.6.” Another says, “HDFC Bank is cheap, its P/B is only 1.8.” Both are using a valuation ratio. But can you use any ratio for any company? No. The wrong ratio can make an expensive stock look cheap, or a good company look risky.

In this guide we explain the P/E vs P/B ratio in plain language. We use the kirana shop in your lane as our first example, then check real numbers for TCS (for P/E) and HDFC Bank (for P/B). You will also learn which ratio suits which kind of company, and what to use when both ratios fail.

Quick answer: P/E tells you how many rupees you pay for ₹1 of yearly profit. P/B tells you how many rupees you pay for ₹1 of the company’s net assets. Use P/E for stable, asset-light businesses such as IT, FMCG and branded pharma. Use P/B (better, P/ABV) for banks and NBFCs. When profit is negative or jumps up and down, or net worth is negative, switch to ratios like EV/EBITDA, EV/Sales or Sum-of-the-Parts.

P/E and P/B in One Simple Example: A Kirana Shop

Imagine a kirana shop in Ahmedabad. After paying rent, salary and all other costs, it earns a net profit of ₹10 lakh a year. If you add up the shop, the stock and the cash, and subtract the loans, the shop’s net worth is ₹1 crore. An investor offers to buy the whole business for ₹1.5 crore.

• P/E = ₹1.5 crore ÷ ₹10 lakh = 15. You are paying ₹15 for every ₹1 of yearly profit. At today’s profit it would take about 15 years to earn your money back.
• P/B = ₹1.5 crore ÷ ₹1 crore = 1.5. You are paying ₹1.50 for every ₹1 of net assets on the books.

Why would anyone pay ₹1.5 crore for a business with ₹1 crore of net assets? Because the shop earns 10% on its net worth (₹10 lakh ÷ ₹1 crore), and things like a good location and loyal customers do not appear on the balance sheet. That 10% is the ROE (Return on Equity), and it is the hidden link between P/E and P/B. We come back to it below.

Point	P/E ratio	P/B ratio
Full form	Price to Earnings	Price to Book Value
Looks at	Profit (income statement)	Net assets (balance sheet)
Formula	Share price ÷ EPS	Share price ÷ Book value per share
Works best for	Stable, asset-light companies	Banks, NBFCs, some power companies
Breaks down when	Profit is negative, tiny or swings wildly	Net worth is negative or value sits in brands and software
Linked to	Earnings growth and quality of profit	ROE (return on equity)

What Is the P/E Ratio? Meaning and Formula

The Price-to-Earnings ratio shows how much investors are paying for every rupee of a company’s profit.

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

EPS = (Net Profit after Tax − Preference Dividend) ÷ Weighted Average Number of Equity Shares

You will see two types of P/E:

• Trailing (TTM) P/E uses the profit of the last four quarters. It is based on actual results, but it looks backwards.
• Forward P/E uses the profit that analysts expect over the next 12 to 24 months. It looks ahead, but it depends on forecasts, and forecasts can be wrong.

Real example: TCS

TCS sells IT services. It has very little debt and does not need heavy machinery, so its reported profit is a fair guide to the cash it generates. Its ROE is above 40% (about 43% to 46% on different websites). That makes P/E a natural fit.

Item	Value (approx., 22 October 2026)
Share price	₹2,507
EPS (trailing twelve months)	₹142.6
P/E ratio = 2,507 ÷ 142.6	About 17.6 times

So investors pay about ₹17.60 for every ₹1 of TCS’s yearly profit. For comparison, the Nifty 50’s P/E was about 19.8 on 16 October 2026. TCS’s own 10-year median P/E is much higher, at around 27, so today’s 17.6 is low by its own history. A low number can mean “cheap”, or it can mean “the market expects slower growth”. A ratio starts the question; it does not finish it.

What Is the P/B Ratio? Meaning and Formula

The Price-to-Book ratio compares the share price with the value of the company’s net assets (its “book value”) per share.

P/B Ratio = Market Price per Share ÷ Book Value per Share (BVPS)

BVPS = (Total Shareholders’ Equity − Preference Capital) ÷ Number of Equity Shares

Note: Some websites also subtract intangible assets such as goodwill and software. That gives the tangible book value, which is stricter. It is a different measure, so do not mix the two when comparing companies.

P/B is most useful for banks and finance companies. A factory’s value depends on its brand, its people and its customers. A bank’s balance sheet is different. Deposits and borrowings are its raw material, and loans are its product. So the balance sheet is the business, and book value actually means something.

Why banks need P/ABV (Price to Adjusted Book Value)

There is a catch. If a bank’s loans go bad but it has not set aside enough money (provisions) for them, the reported net worth looks bigger than it really is. Analysts fix this by deducting the Net NPAs (bad loans left after provisions) from net worth.

Adjusted Net Worth = Net Worth − Net NPAs

P/ABV = Share Price ÷ (Adjusted Net Worth ÷ Number of Shares)

This is a quick rule of thumb used by many analysts. Some also adjust for tax and for the value of subsidiaries, so numbers on different websites can differ slightly.

Real example: HDFC Bank

Item (September 2026, approx.)	Value	Comment
Share price	₹694	23 October 2026
Book value per share (BVPS)	₹391	As shown on market data sites
P/B = 694 ÷ 391	1.77 times
Net NPAs	₹11,851 crore	0.37% of net advances
Number of shares	About 1,540 crore	After the 1:1 bonus of 2025
Net NPA per share	About ₹7.7	11,851 ÷ 1,540
Adjusted BVPS	About ₹383.3	391 − 7.7
P/ABV = 694 ÷ 383.3	1.81 times

The gap between 1.77 and 1.81 is small because HDFC Bank’s bad loans are small (gross NPA 1.11%, net NPA 0.37%). For a bank with heavy bad loans, the gap can be large. Here is a simple imaginary example:

Imaginary bank (₹ crore)	Amount	Result
Market value of all shares	1,000
Reported net worth	1,000	P/B = 1,000 ÷ 1,000 = 1.0 times
Net NPAs	200
Adjusted net worth	800	P/ABV = 1,000 ÷ 800 = 1.25 times

On P/B the bank looks fairly priced at book value. On P/ABV it is already at a premium, because 20% of its net worth is tied up in bad loans.

Watch the share count! A real trap. HDFC Bank gave 1 bonus share for every 1 share held (record date 27 August 2025), so its number of shares roughly doubled. If you divide today’s net worth by the old share count (about 760 crore) and compare it with today’s price, book value per share looks about double what it really is, and P/B looks far cheaper than it is. After any bonus or split, always use the new share count.

The Hidden Link: Why P/B Above 1 Needs a Good ROE

Why does one company trade at 1 times book and another at 6 times? The answer is ROE. A simple textbook formula links the two:

P/B = (ROE − g) ÷ (Ke − g)

• ROE = Net profit ÷ Average shareholders’ equity.
• g = Growth rate of earnings that the company can sustain = ROE × (1 − dividend payout ratio).
• Ke = Cost of equity, the return shareholders expect for taking the risk.

Take a company with an ROE of 15%, a cost of equity of 12%, and a policy of keeping 60% of profit in the business (paying out 40%). Then g = 15% × 60% = 9%, and P/B = (15 − 9) ÷ (12 − 9) = 6 ÷ 3 = 2.0 times. If the ROE were only 12%, the same as the cost of equity, the P/B would be exactly 1.0. If the ROE falls below the cost of equity, the fair P/B drops below 1.

This is a simplified model, and real markets add other factors. But the message is useful. A company deserves more than book value only if it earns more than shareholders expect. A bank that keeps trading below book for years is often telling you about weak returns, bad loans or governance worries. To understand ROE better, read our guide on ROE vs ROCE.

Which Ratio for Which Sector? A Simple Guide

The right ratio depends on what creates the profit: brands and people (which are not on the balance sheet), or money and machines (which are).

Type of business	Main ratio	Backup ratio	Why
FMCG, IT services, branded pharma, consumer leaders	P/E	EV/EBITDA, free cash flow yield	Asset-light. Value comes from brands and people, which are expensed in the profit and loss account, so book value stays low.
Banks, NBFCs, housing finance	P/ABV (or P/B)	P/E	Loans are the assets. Asset quality decides whether the net worth is real.
Steel, metals, cement, commodity chemicals	EV/EBITDA	P/B near the bottom of the cycle	Profit swings with commodity prices. P/E misleads at both peak and trough.
Power generation and transmission regulated by CERC	P/B	EV/EBITDA	The regulator allows a fixed return on equity (a base of about 15% to 15.5%), so profit grows as assets grow.
Loss-making or thin-profit new-age platforms	EV/Sales or EV/GOV	Cash burn, growth trend	Profit is negative or tiny, and book value mostly holds IPO cash.
Conglomerates with many businesses	Sum-of-the-Parts (SOTP)	—	One blended ratio hides the real value of each division.

Here is where the main indices stood in mid-October 2026. Notice how differently each sector is priced.

Index	P/E	P/B	Date (2026)
Nifty 50	19.8	2.84	16 October
Nifty Bank	13.2	About 1.6	16 October
Nifty PSU Bank	7.2	About 1.15	5 October
Nifty IT	17.7	—	12 October
Nifty FMCG	30.6	—	12 October

Figures are approximate, taken from public market data websites. Check NSE’s website for live values.

Two things stand out. The Nifty 50 P/E of about 19.8 is roughly 10% below its five-year median of about 22. And banks trade at a lower P/E and a much lower P/B than the broad market, because they run on borrowed money and must keep a large part of their net worth as a safety cushion under Basel III capital rules.

When P/E and P/B Fail: 4 Situations to Know

1. Cyclical companies: the peak and trough trap

In steel, metals, shipping and commodity chemicals, profit rises and falls with global prices. At the peak of the cycle, profit is huge, so P/E drops to a low single digit and the stock looks cheap. But the market already expects prices to fall, so this is often the riskiest time to buy. At the trough, profit nearly disappears, so P/E looks very high or even negative, yet this can be the better time to buy. P/B is not a safe shortcut either, because assets built near the peak may need to be written down later. Analysts prefer EV/EBITDA on normal, mid-cycle earnings.

2. Loss-making or thin-profit companies

Zomato listed in July 2021 while making losses, so P/E had no meaning. Today, as Eternal (renamed in March 2025), it earns a profit, but a very small one compared with its size. Adding up the last four reported quarters (July 2025 to June 2026), profit is about ₹433 crore. Its market value was about ₹2.8 lakh crore in July 2026. That works out to a P/E of over 600 times, which tells you almost nothing useful. P/B does not help either: the company’s real strengths, such as its app and delivery network, are built inside the business and are not shown as assets, while the balance sheet holds a lot of cash raised from investors. For such companies, analysts look at EV/Sales or EV/GOV (Gross Order Value) and at how fast profit margins are improving.

3. Companies in financial trouble

When a company goes through insolvency under the IBC, losses can wipe out its reserves and even its share capital. Net worth turns negative and P/B has no meaning. P/E can also fool you, because one-time gains such as debt write-backs can make profit look good for a single year.

4. Conglomerates

Reliance Industries runs oil refining (cyclical), telecom (Jio) and retail (Reliance Retail) under one roof. These businesses deserve very different multiples, so one P/E for the whole group blurs the picture. Analysts use Sum-of-the-Parts (SOTP): value each business separately, add the values, and then deduct a “holding company discount”, often in the range of 15% to 30%, though it varies by analyst.

Substitute ratios at a glance

Ratio	Where it is used	Simple meaning
EV/EBITDA	Metals, cement, telecom, infrastructure, capital goods	Enterprise value ÷ EBITDA. Compares companies regardless of how much debt they carry. (Enterprise value = market cap + debt − cash.)
EV/Sales, EV/GOV	Loss-making digital platforms	Enterprise value ÷ revenue or gross order value. Tracks scale and how well sales are turning into profit.
EV/tonne	Cement	Enterprise value ÷ installed capacity. Compares with the cost of building a new plant.
EV/bed	Hospital chains	Enterprise value ÷ operational beds. Useful when new hospital wings are still ramping up and profit is low.
EV/EBITDAR	Airlines	Adds back aircraft rent, so airlines that lease and airlines that own can be compared fairly.
SOTP	Conglomerates and holding companies	Value each business separately, add, then deduct a holding company discount.
DCF	Toll roads, long-term power concessions	Discount the expected cash flows of 20 to 30 years to today’s value.

New to EBITDA? Our guide on EBITDA margin with a real Natco Pharma example explains it step by step.

Indian Traps That Can Mislead Your P/E and P/B

• Nifty P/E before and after April 2021. Until March 2021, NSE calculated the Nifty 50 P/E using standalone earnings. From April 2021 it switched to consolidated earnings, which include subsidiaries. The published P/E fell from about 40 in March 2021 to about 33 in April 2021, mostly because of the change in method, not because the market got cheaper. So do not compare today’s Nifty P/E with data from before April 2021 without adjusting.
• Ind AS 116 (lease accounting), from 1 April 2019. Leases now appear on the balance sheet as a right-of-use asset and a lease liability. Rent is no longer an operating expense; it is replaced by depreciation and interest. As a result, EBITDA goes up, total expenses are higher in the early years of a long lease (so profit is a little lower), and both sides of the balance sheet grow. Retail chains, airlines, hospitals and telecom companies feel this most. Be careful when comparing figures from before and after 2019.
• Corporate tax cut of September 2019. Domestic companies that opt in (and give up certain exemptions) pay a base tax rate of 22%, which comes to about 25.17% with surcharge and cess. New manufacturing companies incorporated on or after 1 October 2019 that started production before the deadline (originally 31 March 2023, later extended to 31 March 2024) could opt for 15%, about 17.16% with surcharge and cess. Lower tax lifted profit and EPS, so today’s P/E is not like-for-like with P/E from before 2019.
• Bonus issues and stock splits. They change the number of shares. As the HDFC Bank example showed, mixing an old share count with a new price gives a wrong P/E or P/B.
• Standalone vs consolidated. Always compare like with like. A parent company’s standalone numbers can be very different from the group’s consolidated numbers.

How to Choose the Right Ratio: 5 Easy Steps

1. Ask what the business sells. If it sells brands, software or services with steady profit and little debt, start with P/E.
2. Is it a bank or NBFC? Use P/ABV (or P/B) and keep P/E as a second check, along with gross and net NPA.
3. Does profit swing with commodity prices? Use EV/EBITDA on average earnings, not on one peak or trough year.
4. Is profit negative, tiny or is net worth negative? Use EV/Sales, EV/GOV or a capacity-based ratio. Do not force P/E or P/B.
5. Does it run many businesses? Try SOTP. Then, for any ratio, compare the company with its peers and with its own past, and check ROE, debt and growth.

Common Mistakes to Avoid

• Calling every low P/E “cheap”. It may reflect slow growth, a cyclical peak or one-time profit.
• Using P/E alone for a bank. Provisioning cycles distort bank profit. Check P/ABV and asset quality too.
• Comparing P/E across sectors. An FMCG company at 30 times and a bank at 13 times are not directly comparable.
• Ignoring one-time items. A land sale or a tax write-back can inflate EPS for one year.
• Using the wrong share count after a bonus or split.
• Using Nifty P/E history from before April 2021 as if it were the same measure.
• Trusting a single ratio. Valuation ratios work best together with ROE, debt and cash flow.

Key Takeaways

• P/E = Price ÷ EPS. It shows how much you pay for ₹1 of yearly profit. P/B = Price ÷ Book value per share. It shows how much you pay for ₹1 of net assets.
• Use P/E for stable, asset-light companies such as TCS. Use P/ABV for banks such as HDFC Bank, because bad loans can make reported net worth look too high.
• A P/B above 1 is justified only when ROE is higher than the cost of equity.
• For cyclical, loss-making, insolvent or diversified companies, use EV/EBITDA, EV/Sales, capacity-based ratios or SOTP.
• In India, watch for the April 2021 change in the Nifty P/E method, Ind AS 116, the 2019 tax cut, and the share count after bonus issues and splits.

Frequently Asked Questions (FAQs)

What is the difference between P/E and P/B ratio?

P/E compares the share price with profit per share. P/B compares the share price with net assets (book value) per share. P/E looks at earning power; P/B looks at the balance sheet.

Which is better, P/E or P/B?

Neither is better in every case. P/E suits stable, asset-light companies such as IT and FMCG. P/B (or P/ABV) suits banks and NBFCs. For cyclical or loss-making companies, other ratios such as EV/EBITDA or EV/Sales work better.

Is a low P/E ratio always good?

No. A low P/E can mean the stock is cheap, but it can also mean the market expects profit to fall. This is common in cyclical companies at the peak of their cycle. Always check growth, debt and the quality of profit.

What is a good P/B ratio?

There is no single number. A P/B above 1 is justified only if ROE is higher than the cost of equity. Compare a company with its peers and its own history. Banks usually trade at much lower P/B than asset-light sectors.

Why is P/ABV used for banks?

Because reported net worth can look too high if bad loans are not fully provided for. P/ABV deducts the Net NPAs from net worth, which gives a more honest base for valuation.

Why is P/E not reliable for cyclical companies?

Profit rises and falls with commodity prices. At the peak, profit is high and P/E looks low. At the trough, profit is low and P/E looks high or negative. Both signals can mislead, so analysts prefer EV/EBITDA on average earnings.

Can the P/E ratio be negative?

Yes. If a company makes a net loss, EPS is negative and so is P/E. A negative P/E has no useful meaning, so analysts use other measures such as EV/Sales.

What can I use when P/E and P/B both fail?

Use EV/EBITDA for capital-heavy and cyclical businesses, EV/Sales or EV/GOV for loss-making platforms, EV/tonne for cement, EV/bed for hospitals, EV/EBITDAR for airlines, SOTP for conglomerates and DCF for long-term projects.

Source and disclaimer: Market figures (share prices, P/E, P/B, book value, index levels) are approximate and were taken from public market data websites, company results coverage and NSE-based data around 16 to 23 October 2026. They change every day, so please check live values before using them. HDFC Bank asset quality figures are from its Q2 FY27 results (quarter ended 30 September 2026). Eternal’s profit is our own addition of four reported quarters. Tax, lease-accounting and NSE method details are from official notifications and the Income Tax Department. The imaginary examples (kirana shop, imaginary bank, ROE example) use made-up numbers. TCS and HDFC Bank are used only to explain the ratios, not as a recommendation. This article is for education only and is not investment advice. Please do your own research or consult a SEBI-registered investment adviser before making any investment decision.