Valuation Metrics: P/E, P/B, and More
Valuation metrics help you determine whether a stock is cheap or expensive relative to its earnings, assets, or growth. No single metric tells the full story — skilled investors use multiple ratios together.
Price-to-Earnings (P/E) Ratio: the most widely used metric. Trailing P/E uses past 12 months earnings; Forward P/E uses estimated future earnings. Compare P/E against (1) the stock's own historical range, (2) sector peers, and (3) the broader market. Nifty 50 historical average P/E is 20-22. A stock at P/E 40 in a sector averaging 15 demands a justification.
Price-to-Book (P/B) Ratio: compares market price to book value (net assets per share). P/B < 1 means the stock trades below the value of its physical assets — could be a bargain or a value trap. Especially useful for banking and financial companies where assets dominate. Avoid high P/B companies with low Return on Equity (ROE).
EV/EBITDA (Enterprise Value to EBITDA): better than P/E for comparing companies with different debt levels. EV = Market Cap + Total Debt - Cash. EBITDA = Earnings Before Interest, Tax, Depreciation, and Amortization. This metric is capital-structure-neutral and excellent for comparing capital-intensive businesses like telecom and steel.
PEG Ratio = P/E ÷ Earnings Growth Rate. A PEG of 1 is considered fairly valued; below 1 potentially cheap given growth. This metric penalises high P/E stocks with slow growth and rewards fast growers trading at reasonable P/E multiples. Peter Lynch popularized PEG for growth stock analysis.
Dividend Yield = Annual Dividend ÷ Stock Price × 100. High-dividend-yield stocks (4%+) in India include Coal India, ONGC, and Power Grid. Yield rises when either dividends increase or stock price falls — always check which is causing a high yield.
Practical Exercises
- 1
Compare P/E and P/B ratios of 3 private sector banks (HDFC, ICICI, Axis) using Screener.in
- 2
Calculate the PEG ratio for 3 IT companies using their P/E and 3-year EPS growth rate
- 3
Find 5 Nifty 50 stocks with dividend yield above 3% and check their 5-year dividend history
Key Takeaways
Always compare valuation ratios against sector peers and historical averages, not in isolation
P/B ratio is especially useful for banks; EV/EBITDA for capital-intensive industries
PEG ratio accounts for growth — a high P/E with high growth can be justified
High dividend yield can signal value or distress — always check the reason
Chapter Quiz
1. A stock with P/E 30 and earnings growth of 30% has a PEG ratio of:
2. EV/EBITDA is preferred over P/E because it:
3. A P/B ratio below 1 indicates the stock trades:
4. If a company cuts its dividend, what typically happens to dividend yield?
* This content is for educational purposes only and does not constitute financial advice. Investments in securities markets are subject to market risks. Consult a SEBI-registered financial advisor for personalized guidance.