PE, PB and ROE: three ratios that say if a price is fair

The three questions

Every share price answers three questions in one number, and the three ratios split it apart:

• PE (price to earnings): how many rupees do you pay for each rupee the company earns a year?
• PB (price to book): how many rupees do you pay for each rupee of the company's net worth on its balance sheet?
• ROE (return on equity): how many rupees of profit does management make from each rupee of that net worth?

PE tells you about the price against profit. ROE tells you about the quality of the business. PB sits between them, and the link is exact, which makes the three ratios a small system rather than three separate numbers.

The formulas, with one company

Take a company with a share price of ₹200, annual earnings per share (EPS) of ₹10, and book value per share (BVPS) of ₹80. All figures are assumed for the example.

• PE = 200 / 10 = 20
• PB = 200 / 80 = 2.5
• ROE = EPS / BVPS = 10 / 80 = 12.5%

Now check the link: PE × ROE = 20 × 0.125 = 2.5, which is the PB. The identity holds always, because PE is price over EPS, ROE is EPS over BVPS, and multiplying them cancels EPS. It is worth remembering, because it tells you that when you see a high PB, you should ask whether the ROE earns it.

Two companies side by side

Compare Company A with a second company, B, with a share price of ₹300, EPS of ₹25 and BVPS of ₹100.

At first glance B looks expensive on PB (3.0 against 2.5) and A looks expensive on PE (20 against 12). Each ratio alone points to a different answer. Put together: B earns twice the return on its equity, and you pay fewer rupees per rupee of profit. A has a lower PB only because it is a less profitable business. In this stylised case B is the stronger business at a lower earnings multiple, though not necessarily the better investment, since the example says nothing about growth, debt or whether B's 25% can last.

What each ratio hides

PE can mislead when earnings are unusual. A cyclical company, such as a metals or commodity producer, can show a very low PE at the top of the cycle, when profits are at a peak and about to fall. It can show a very high PE at the bottom, when profits have collapsed. Look at several years of earnings, not the latest. A one-off gain or loss also distorts it.

PB depends on accounting. Book value is what accounting says the assets are worth less the liabilities. For an asset-light company such as software or a consumer brand, the value is in people and brands that the balance sheet does not carry, so PB is high and not very informative. For lenders, PB and ROE are the usual pair; see how a sector sits in our post on the Nifty Bank price-to-book ratio.

ROE can be inflated by debt. ROE is profit over equity, and a company can raise it by borrowing more, which shrinks equity relative to assets. A high ROE with high debt is not the same as a high ROE with little debt. Check the debt-to-equity ratio and interest cover in the company's filings, which you can find on the BSE website.

Using the three together

A practical sequence:

1. Start with ROE and its trend. Has it been steady for five or ten years? A one-year spike is not quality.
2. Look at PE against growth and the company's own range. The glossary entry on the PE ratio defines it, and the PB ratio entry does the same for book value.
3. Use the identity as a sanity check. If PB is far above PE × ROE for the earnings you assume next year, you are paying for growth that has to arrive.
4. Compare against peers, not against the market as a whole. A bank and a software company have no reason to share a PE.

You can see how the whole market compares on the Nifty PE ratio page, and our guide to reading an index PE ratio explains what the aggregate number does and does not tell you. If you wonder whether the market is expensive, read is the market expensive?. For the monthly view, see the Nifty 50 PE ratio for October 2026.

Where these ratios fit in an approach

Ratios do not give a buy or sell signal. They give you a way to describe what you are paying for. Value versus growth investing shows how two styles read the same numbers differently, and the post on finding undervalued stocks shows how a value investor uses them with a margin of safety.

If you hold mutual funds rather than stocks, the same ratios appear at the fund level as a weighted average of the portfolio. The screener lets you filter funds, and the methodology page explains how we compute our metrics from NAV history. A fund with a very high portfolio PE is paying for growth; it is worth knowing before you buy.

Company filings follow SEBI's disclosure rules, and the regulator's investor site explains how to read them. A ratio is only as good as the numbers behind it, so use the latest audited results and check the notes.

A final caution: ratios are snapshots. A company with a low PE and a falling ROE is often cheap for a reason, and a company with a high PE and a rising ROE can grow into its price. Always ask what the next three years of earnings are likely to look like and what would have to go right for the price to be justified. If you cannot answer in a sentence, you probably do not yet understand the business well enough to own it directly, and a diversified fund is a reasonable alternative.

This post is for education only and is not investment advice. The examples are illustrations, not recommendations on any company; verify figures from official filings.