What is PB (Price-to-Book) x PE (Price-to-Earnings) in Share Market
PB x PE is a combined financial metric used in the stock market to assess the value of a company. It is derived by multiplying two key ratios: Price-to-Book (PB) Ratio and Price-to-Earnings (PE) Ratio. The resulting figure provides a way to gauge both the market valuation relative to the company’s book value and its earnings potential.
1. Price-to-Book (PB) Ratio
The PB ratio compares a company’s market price per share to its book value per share. It is used to assess whether a stock is undervalued or overvalued relative to its net assets (book value).
PB Ratio = Market Price per Share / Book Value per Share
Where:
- Market Price per Share is the current market price of a single share.
- Book Value per Share is the net asset value of the company (total assets minus liabilities) divided by the total number of outstanding shares.
A PB ratio of less than 1 can suggest that the stock is undervalued relative to its book value, whereas a ratio above 1 can suggest overvaluation.
2. Price-to-Earnings (PE) Ratio
The PE ratio measures a company’s current market price relative to its earnings per share (EPS). It is a widely used indicator to assess how much investors are willing to pay for each dollar of earnings.
PE Ratio = Market Price per Share / Earnings per Share (EPS)
Where:
- Earnings per Share (EPS) is the company’s net income divided by the number of outstanding shares.
A high PE ratio may suggest that the market expects high future growth from the company, while a low PE ratio might indicate undervaluation or low growth expectations.
3. PB x PE
When you multiply the PB ratio and the PE ratio, the resulting figure, PB x PE, is a composite measure that combines the stock’s valuation relative to both its book value and earnings. Here’s how it can be interpreted:
- High PB x PE: A high value suggests that the company might be overvalued in both terms of its book value and earnings potential, possibly indicating that investors are expecting strong future growth or that the stock is expensive.
- Low PB x PE: A lower value could indicate that the stock might be undervalued relative to its book value and earnings, suggesting potential for growth or simply that the stock is cheap.
Usage of PB x PE:
- Value and Growth Assessment: Investors use PB x PE to get a sense of whether a stock is expensive or cheap when considering both tangible assets (book value) and the company’s earning potential.
- Comparative Analysis: This combined ratio is useful for comparing companies within the same industry or sector to identify those that are potentially undervalued or overvalued.
Limitations:
- Industry-Specific: PB x PE can vary significantly by industry. For example, high-growth sectors like technology may have high PE ratios and lower PB ratios, while stable industries like utilities may have low PE ratios and higher PB ratios.
- Asset-heavy vs. Earnings-heavy: Companies with heavy assets (e.g., real estate or manufacturing) may have a high PB ratio but lower PE ratio, while service-based or tech companies may have the opposite.
In summary, PB x PE is a metric used to get a more holistic view of a company’s valuation by combining two important ratios — price-to-book and price-to-earnings. This combined ratio can be useful for investors to compare companies and evaluate whether stocks are trading at fair value based on both their asset base and earnings potential.
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