Metric Explainer: Price-to-Book Ratio (PB)
How much the market values the company compared to its accounting (book) value. PB of 3 means the market values each ₹1 of book value at ₹3. "PB Ratio batata...
Simple definition
How much the market values the company compared to its accounting (book) value. PB of 3 means the market values each ₹1 of book value at ₹3.
🗣️
"PB Ratio batata hai ki market company ki kitaabi value ke muqable mein kitna zyada ya kam value karti hai. PB 2 = books mein ₹100 hai, market ₹200 lagata hai."
Why it matters
- Primary valuation metric for banks — PE can be misleading due to provisioning; PB is more stable
- Asset-heavy company valuation — manufacturing, real estate, infra
- Floor valuation — PB < 1 means market values the company below its liquidation value
- ROE connection — high ROE companies deserve high PB (justified PB = ROE / Cost of Equity)
Formula
PB Ratio = Market Price per Share / Book Value per Share
Where BVPS = Shareholders' Equity / Number of Shares
Justified PB (theoretical)
Justified PB = (ROE − g) / (r − g)
Where r = cost of equity, g = sustainable growth rate
A company with ROE = 18%, cost of equity = 12%, growth = 8% → Justified PB = (18% − 8%) / (12% − 8%) = 2.5×
Good range — by sector
| Sector | Premium PB | Fair PB | Cheap PB |
|---|---|---|---|
| Private Banks | > 3.0 | 1.5–3.0 | < 1.5 |
| PSU Banks | > 1.5 | 0.8–1.5 | < 0.8 |
| IT Services | > 12 | 8–12 | < 8 |
| Manufacturing | > 4 | 2–4 | < 2 |
| Real Estate | > 3 | 1.5–3 | < 1.5 |
| Steel/Cement | > 2 | 1–2 | < 1 |
When PB < 1 (below book value)
| Possible reason | Action |
|---|---|
| Genuinely undervalued (turnaround potential) | Deep research — potential opportunity |
| Assets overstated on balance sheet | Dangerous — actual liquidation value lower |
| Structural decline in business | Avoid — "value trap" |
| Cyclical trough | May be opportunity if balance sheet is clean |
Common mistakes
Mistakes to avoid
- Comparing IT PB with Bank PB — IT trades at PB 10+ because of intangible value (employees, IP). Banks at PB 2 is fair
- Book value ≠ real value — Accounting book value may not reflect market value of land, brands, or IP
- Negative book value — Makes PB meaningless (liabilities > assets)
- Goodwill inflation — Large acquisitions at premium inflate book value without real asset backing
Real example: Banks and PB
| Bank | PB | ROE | Why |
|---|---|---|---|
| HDFC Bank | 2.8 | 16% | Premium quality, strong ROE |
| SBI | 1.5 | 15% | PSU discount despite improving metrics |
| PNB | 0.8 | 8% | Low ROE, legacy NPA issues |
| Kotak Bank | 3.5 | 14% | Premium franchise, perceived quality |
PB tracks ROE closely. Banks with higher ROE command higher PB multiples.
Red flags
- PB > 10 for a non-tech company — check if book value is artificially low
- PB < 1 for multiple years — potential value trap, check asset quality
- PB rising rapidly without ROE improvement — sentiment-driven re-rating
- High goodwill in book value — may overstate true net worth
Related metrics
- PE Ratio — Earnings-based valuation (use PE for profitability)
- ROE — High ROE justifies high PB
- Book Value — The denominator in PB ratio
- GNPA/NNPA — For banks, asset quality drives PB