The Key Difference Between Price-to-Earnings and Price-to-Book

Price-to-Earnings vs Price-to-Book Ratio
Feature	Price-to-Earnings (P/E) Ratio	Price-to-Book (P/B) Ratio
Definition	Measures the price investors are willing to pay for each rupee of a company’s earnings.	Measures the price investors are willing to pay for each rupee of the company’s net asset value (book value).
Formula	P/E = Market Price per Share / Earnings per Share (EPS)	P/B = Market Price per Share / Book Value per Share
Purpose	Indicates how expensive or cheap a stock is relative to its earnings.	Shows how the market values the company’s net assets relative to its book value.
Focus	Focuses on profitability and earnings performance.	Focuses on asset base and balance sheet strength.
Usefulness	Useful for evaluating earnings growth and profitability.	Useful for assessing asset-heavy companies and financial stability.
Interpretation of High Ratio	May indicate high growth expectations or overvaluation.	May indicate the market values assets highly or expects strong future performance.
Interpretation of Low Ratio	May suggest undervaluation or low growth prospects.	May indicate undervaluation or problems with asset quality.
Industry Relevance	More relevant for companies with steady earnings, e.g., tech, consumer goods.	More relevant for capital-intensive industries, e.g., manufacturing, banking, real estate.
Volatility	Earnings can be volatile, affecting the ratio significantly.	Book value is relatively stable, less affected by short-term fluctuations.
Accounting Impact	Earnings can be influenced by accounting policies, non-recurring items.	Book value is affected by asset revaluations, depreciation methods.
Growth Companies	Often have high P/E due to expected future earnings growth.	P/B may be high if assets are intangible or undervalued.
Value Companies	Often have low P/E, possibly reflecting mature or stagnant earnings.	Often have low P/B, indicating potential undervaluation of assets.
Limitations	Can be misleading if earnings are negative or volatile.	May undervalue companies with significant intangible assets.
Impact of Intangibles	Not directly considered in earnings.	Intangible assets like goodwill may not be fully reflected in book value.
Investor Focus	Attracts growth and income investors interested in earnings.	Favored by value investors focused on asset backing.
Market Conditions	Can be skewed in bull markets with high investor optimism.	More stable during market cycles as assets are tangible.
Example	A stock trading at ₹200 with EPS ₹10 has P/E of 20.	A stock trading at ₹200 with book value per share ₹100 has P/B of 2.
Summary	P/E ratio is a profitability metric showing market’s expectation of earnings growth.	P/B ratio measures market valuation relative to company’s net assets and balance sheet strength.