What are PE and PB ratios?

The price-to-earnings (P/E) ratio and price-to-book (P/B) ratio are important market valuation metrics used by investors to assess the attractiveness of a company’s stock.

Price-to-Earnings (P/E) Ratio:

• The P/E ratio compares a company’s current stock price to its earnings per share (EPS).
• It indicates how much investors are willing to pay for each dollar of earnings generated by the company.
• A higher P/E ratio suggests that investors are willing to pay more for the company’s earnings, indicating that the stock may be overvalued. Conversely, a lower P/E ratio may suggest that the stock is undervalued.
• The P/E ratio provides insight into investor sentiment and expectations about a company’s future earnings growth potential. Growth stocks typically have higher P/E ratios, reflecting expectations for future earnings growth, while value stocks tend to have lower P/E ratios.
• However, the P/E ratio should be interpreted in the context of the company’s industry, growth prospects, and historical valuation trends.

Price-to-Book (P/B) Ratio:

• The P/B ratio compares a company’s current market price to its book value per share.
• Book value per share is calculated by dividing the company’s total equity by its number of outstanding shares.
• The P/B ratio provides insight into whether a stock is trading at a premium or discount relative to its book value.
• A P/B ratio greater than 1 indicates that the stock is trading at a premium to its book value, suggesting that investors are willing to pay more than the company’s net asset value. – Conversely, a P/B ratio less than 1 may indicate that the stock is undervalued relative to its book value.
• Like the P/E ratio, the P/B ratio should be considered in conjunction with other factors such as industry comparables, growth prospects, and market conditions.