Equisigma Investor Academy - Sunday Learning Series

Equisigma Investor Academy – Sunday Learning Series

Lesson 3: Price-to-Book (P/B) Ratio – The Right Way to Value Banks & Financial Companies

Quick Recap

After learning the P/E and PEG ratios, we now move to the Price-to-Book (P/B) Ratio, a key valuation metric for banks, NBFCs and other financial businesses.

What is P/B?

P/B compares the market price of a share with its book value (net worth per share). It shows how much investors are willing to pay for every ₹1 of the company's net assets.

Formula

P/B = Market Price per Share ÷ Book Value per Share

Illustration

Item	Example
Market Price	₹600
Book Value	₹300
P/B	2.0

How to Interpret

·         P/B below 1 may indicate undervaluation or hidden risks.

·         High-quality banks often trade above book value.

·         Compare P/B only with companies in the same industry.

When is P/B Most Useful?

·         Banks

·         NBFCs

·         Insurance companies

·         Asset-heavy businesses

Common Mistakes

·         Buying only because P/B is low.

·         Ignoring ROE and asset quality.

·         Comparing banks with manufacturing companies.

Equisigma Insight

A low P/B ratio alone does not make a stock attractive. We combine P/B with ROE, asset quality, capital adequacy, management quality and growth prospects before arriving at an investment conclusion.

Quiz of the Week

1.       What does P/B measure?

2.       Why is P/B useful for banks?

3.       Can a P/B below 1 still be risky?

4.       Which ratio should be analysed with P/B?

Key Takeaways

·         P/B measures valuation relative to net assets.

·         It is one of the best valuation tools for financial companies.

·         Always use P/B together with ROE and other fundamentals.

·         Quality businesses deserve quality valuations.

Coming Next Sunday

EV/EBITDA – The Professional Investor's Favourite Valuation Metric.

Best Regards

Team Equisigma