P/B Ratio

Book value represents a company's total assets minus total liabilities — essentially shareholders' equity as recorded in the balance sheet. When the P/B ratio is above 1, the market values the company higher than its accounting worth, implying confidence in future earnings, brand value, or intangible strengths. A P/B below 1 can suggest undervaluation or, alternatively, that the business is eroding value.

In India, the P/B ratio is especially relevant for financial sector companies — banks, NBFCs, and insurance firms — where the balance sheet itself is the business. HDFC Bank, one of India's most consistently profitable private banks, commanded P/B ratios of 3x–4x over much of the 2015–2023 period, reflecting the premium investors placed on its asset quality, low NPA levels, and steady return on equity. In contrast, several PSU banks traded below 0.5x book at points when their non-performing asset (NPA) ratios were elevated.

For asset-light industries — technology services, for example — P/B is less instructive. TCS and Infosys generated enormous returns on capital with relatively modest tangible assets; their book values were small compared to their earnings power, making P/B ratios look very high but not meaningfully overvalued. In such cases, P/E or EV/EBITDA are more appropriate measures.

Indian retail investors should be cautious about two distortions in book value. First, revaluation of assets (especially land and property) can artificially inflate book value without reflecting true earning capability. Second, large goodwill balances from past acquisitions can make book value appear inflated while the underlying business may be struggling. Always read the notes to accounts when interpreting book value.

The P/B ratio also interacts with return on equity: a company that earns an ROE of 20% will naturally command a higher P/B than one earning 8%, all else equal. This relationship — known as the justified P/B — helps assess whether the premium being paid is backed by superior profitability.