WHY do we need P/B? Stock prices reflect future expectations, but balance sheets show current asset backing. P/B tells us: "For every ₹1 of net assets the company owns, how much am I paying?"
WHAT is book value?
Start with accounting identity: Assets = Liabilities + Equity
Rearrange: Equity = Assets − Liabilities
This equity is "book value"—what shareholders theoretically own
HOW do we build P/B?
Take the market cap (what the market says the company is worth): Market Cap=Share Price×Shares Outstanding
Take book value from the balance sheet: BV=Total Assets−Total Liabilities
Divide to get the ratio:
P/B=Book ValueMarket Cap=A−LP×N
Where P = price per share, N = shares outstanding, A = total assets, L = total liabilities.
Per-share version (more common in practice):
P/B=Book ValuePrice per Share
Book Value per Share=Shares OutstandingTotal Equity
WHY do we need P/S? Revenue is the "top line"—very hard to manipulate compared to earnings (which involve subjective expense recognition, depreciation, tax strategies). For unprofitable growth companies, P/S is the most reliable valuation metric.
WHAT does P/S tell us?
How much am I paying for each₹1 of revenue the company generates?
Lower P/S = cheaper relative to sales generation capability
HOW do we construct it?
Take market cap: MC=P×N
Take revenue from income statement: R (typically annual or TTM—trailing twelve months)
WHY do we need EV/EBITDA? P/E and P/B only look at equity value, but companies are financed by both equity and debt. If you're acquiring a company, you pay for equity AND assume debt (minus any cash you get). EV/EBITDA reflects the true acquisition multiple and neutralizes capital structure differences.
WHAT is Enterprise Value?
Think of buying a house with a mortgage:
House price (market cap) = ₹1 crore
Mortgage debt = ₹40 lakh
Seller will give you ₹10 lakh cash inside the house
Your actual cost = ₹1 crore (equity) + ₹40 lakh (debt you assume) − ₹10 lakh (cash you receive) = ₹1.3 crore
EV=Market Cap+Total Debt−Cash
WHAT is EBITDA?
EBITDA strips out:
Interest: Depends on debt levels (financing choice)
EBITDA=Operating Income (EBIT)+Depreciation+Amortization
WHY this structure? EV (the price) matches with EBITDA (the cash flow available to all capital providers—both equity and debt). P/E matches price with earnings available only to equity.
| Ratio | What It Measures | Best For | Limitation |
|-------|------------------|------------|
| P/B | Market value vs net assets | Banks, asset-heavy, distressed | Ignores intangibles, book values can be stale |
| P/S | Market value vs revenue | Unprofitable growth, cyclicals | Ignores profitability/margins |
| EV/EBITDA | Total value vs operating cash | Capital-intensive, M&A, cross-capitalstructure | Ignores capex, working capital, taxes |
The 80/20: For most valuations, combine these:
P/E for profitable, stable companies
P/S for growth/unprofitable companies
EV/EBITDA for capital-intensive or high-debt companies
P/B for financials or deep value plays
Recall Feynman Technique: Explain to a 12-Year-Old
Imagine you want to buy a toy store. There are three ways to figure out if the price is fair:
P/B (Price-to-Book): Look at all the toys, shelves, and cash in the store. Add them up, subtract what the store owes (like rent debt). That's "book value." If the store costs ₹100 but the stuff inside is worth ₹50, you're paying 2× book value (P/B = 2). Low number = cheaper.
P/S (Price-to-Sales): Forget profit—just look at how much money comes in the door from selling toys each month. If the store makes ₹10 in sales and costs ₹20 to buy, you're paying 2× sales (P/S = 2). This helps when the store isn't making profit yet but is super busy.
EV/EBITDA: Now imagine the store has a loan. The REAL cost to you is the store price PLUS you have to pay off that loan, MINUS any cash sitting in the register (you get to keep that). That's EV. EBITDA is the money the store makes before paying the loan interest or taxes—pure toy-selling power. If EV is ₹80 and EBITDA is ₹10, the ratio is 8. It means8 years of toy-selling to pay off the total cost.
All three tell you different things. Book value shows what's physically there. Sales show how busy the store is. EV/EBITDA shows the true takeover cost versus cash-making ability.
Dekho, jab hum kisi company ki value nikalte hain, toh sabse popular ratio hota hai P/E, lekin iska ek badaa problem hai—agar company ka earnings hi negative ho, ya accounting tricks se manipulate kiya gaya ho, toh P/E kaam nahi karta. Isliye humein alag lenses chahiye. Yahan teen ratios aate hain: P/B (Price-to-Book) batata hai ki company ke net assets ke liye tum kitna pay kar rahe ho, P/S (Price-to-Sales) revenue ke hisaab se valuation dikhata hai jo earnings se harder-to-manipulate hota hai, aur EV/EBITDA total company value ko operating cash generation se compare karta hai. Simple words me, ye teeno alag-alag angle se dekhte hain ki company sasti hai ya mehngi.
Ab P/B ki core intuition samjho. Balance sheet me ek simple identity hoti hai: Assets = Liabilities + Equity, matlab Equity = Assets − Liabilities. Yeh equity hi "book value" hai—agar aaj company band kar do aur sab bech do, toh shareholders ke paas jitna bachega. P/B ratio bas yeh puchta hai: "Har ₹1 ke net assets ke liye main kitne rupaye de raha hoon?" Jaise example me Industrial Bank ka P/B nikla 10, matlab investors ₹1 ke book value ke liye ₹10 de rahe hain—yeh high hai, market ko strong future growth ki umeed hai. Banks aur real estate jaise asset-heavy business me yeh ratio kaafi useful hai kyunki inke real assets balance sheet pe dikhte hain.
Par ek zaroori baat—ek common galti hai sochna ki "P/B < 1 matlab hamesha bargain hai." Feel toh sahi hota hai ki book value ₹100 hai aur share ₹80 me mil raha hai, discount! Lekin book value overstated bhi ho sakti hai. Jaise ek steel company ke purane furnaces books pe ₹500 crore dikha rahe hain, par asli me woh obsolete hain aur sirf ₹50 crore ke worth hain. Isiliye ratios ko blindly follow mat karo—hamesha soch ke dekho ki underlying numbers realistic hain ya nahi. Yahi asli skill hai valuation me.
