Price to Book (P/B) Ratio Explained for Indian Stocks
The price to book ratio compares a company’s share price to its book value per share, which is shareholders’ equity divided by the number of outstanding shares. A P/B of 2.5 means the market is paying Rs 2.50 for every rupee of net assets on the balance sheet.
Book value comes straight from Schedule III of the Companies Act format: equity share capital plus other equity, which includes reserves and surplus. Subtract nothing else unless you want tangible book value, in which case goodwill and other intangibles come out too.
P/B is the sharpest tool available for banks and a nearly useless one for asset light services companies. Knowing which is which saves you from a bad screen.
The Formula With Numbers
Take an illustrative Indian private bank. Total equity on the consolidated balance sheet is Rs 6,000 crore and there are 30 crore shares outstanding, so book value per share is Rs 200. The share trades at Rs 500, giving a P/B of 2.5.
Now the tangible version. Suppose Rs 600 crore of that equity is goodwill from an old acquisition. Tangible book value becomes Rs 5,400 crore, tangible book per share is Rs 180, and price to tangible book rises to 2.78. Same company, different picture.
- P/B equals market price per share divided by book value per share
- Equivalently, market capitalisation divided by total shareholders’ equity
- Use consolidated equity if the company has meaningful subsidiaries
- Use diluted share count where large ESOP pools or convertibles exist
Where P/B Genuinely Works
For a bank or an NBFC, the balance sheet is the business. Loans and investments are carried close to realisable value, equity is the buffer against loan losses, and return on equity is what drives the multiple. So P/B compared against sustainable return on equity is a sound valuation frame.
It also helps with deep cyclicals near a trough. When a metals company earns almost nothing, its PE is meaningless while book value still tells you what the plants are carried at.
Where It Misleads
An IT services firm, a consumer brand, or an asset light platform holds very little on its balance sheet. Its real assets are code, brand recall, distribution relationships, and people, and Indian accounting expenses most of that spending as it happens rather than capitalising it.
Result: book value stays small, P/B looks high, and the ratio tells you nothing about whether the stock is expensive. A software firm at 9 times book and a steel firm at 0.9 times book are not comparable in any useful sense.
Revaluation Reserves
Under Ind AS a company may revalue property, plant and equipment, with the increase credited to a revaluation surplus inside other equity. Book value jumps, P/B falls, and nothing about the operating business has improved. Check the notes to accounts for a revaluation reserve before treating a low P/B as value.
Buybacks and Write-offs
A buyback reduces cash and equity, so P/B mechanically rises even though the company just returned money to shareholders. Conversely a large impairment slashes equity and inflates P/B overnight. Both are accounting effects, not verdicts on value.
P/B Usefulness by Business Type
| Business type | Is P/B useful? | Better companion metric |
|---|---|---|
| Banks and NBFCs | Yes, primary metric | Return on equity, gross NPA, provision coverage |
| Cyclical manufacturing | Useful near troughs | Replacement cost, EV/EBITDA through the cycle |
| IT services | Weak | PE, free cash flow, return on capital |
| Consumer brands | Weak | PE, EV/EBITDA, return on capital employed |
| Real estate | Mixed, land carried at cost | Net asset value, pre sales |
How to Use It Without Getting Trapped
Never read P/B alone. Pair it with return on equity, because a bank at 3 times book earning 18 percent on equity can be better value than one at 1.2 times book earning 7 percent. The multiple you should pay rises with sustainable returns.
Then verify the book. For a lender that means checking asset quality and provisioning, since reported equity assumes the loan book is worth what the balance sheet says. A bank trading at 0.4 times book is usually the market saying it does not believe that number.
Frequently Asked Questions
Does a P/B below 1 mean the stock is undervalued?
Not by itself. It often means the market expects asset write downs, weak returns, or continued losses that will erode book value. Cheap on book with a falling book is a value trap.
How is book value different from face value?
Face value is the nominal value printed on the share, often Rs 1, 2 or 10, and it barely changes. Book value is the accounting net worth per share and moves every quarter with profits, dividends, and reserves.
Should I use standalone or consolidated book value?
Consolidated, for any company with operating subsidiaries, since standalone equity omits the value built up in those units. Keep the share count and price on the same consolidated basis.
Why do banks get compared on price to book rather than PE?
Because bank earnings depend on provisioning judgement that can shift sharply between quarters, while equity is the loss absorbing buffer regulators actually monitor. P/B against return on equity gives a steadier comparison across lenders.
Where do I find book value in an annual report?
Look at the balance sheet under equity and liabilities, at the equity share capital and other equity lines prescribed by Schedule III. The notes then break other equity into reserves, retained earnings, and any revaluation surplus.
Key Takeaways
- P/B equals price per share divided by book value per share.
- It is a primary metric for banks and NBFCs, weak for asset light firms.
- Revaluation reserves can inflate book value and flatter a low P/B.
- Buybacks and impairments move P/B without changing the business.
- Always read P/B alongside return on equity and asset quality.
