P/E Ratio vs P/B Ratio: Which Valuation Metric to Use
Short answer. The P/E ratio divides the share price by earnings per share, showing how much investors pay for each dollar of profit. The P/B ratio divides price by book value per share, showing what they pay for each dollar of net assets. P/E fits profitable, going-concern firms; P/B fits banks, insurers and asset-heavy businesses.
Side by side
| Price-to-earnings (P/E) | Price-to-book (P/B) | |
|---|---|---|
| Formula | Price / earnings per share | Price / book value per share |
| Based on | Profit (income statement) | Net assets (balance sheet) |
| Best for | Profitable, stable earners | Banks, insurers, real estate, asset-heavy firms |
| Weak when | Earnings are negative or volatile | Assets are intangible and not on the books |
| Low value suggests | Cheap relative to earnings, or low growth | Cheap relative to assets, or poor returns |
| Typical range | Often 10-30 for the broad US market | Often 1-5 for the broad US market |
| Pair with | Growth rate (PEG) and margins | Return on equity |
Which one fits you?
Lean towards Price-to-earnings (P/E) if…
- the company is profitable and its earnings are steady
- you compare growth companies in one sector
Lean towards Price-to-book (P/B) if…
- you analyse a bank, insurer or REIT
- you look for stocks trading below net asset value
Frequently asked questions
What is a good P/E ratio?
There is no universal answer. Compare with the company’s history, its sector and its growth rate.
Can P/B be below 1?
Yes. It means the market values the equity below its accounting book value, which may signal distress or an opportunity.
Which is better for tech stocks?
P/B is less useful as value sits in intangibles that do not appear on the balance sheet; P/E, EV/sales or free cash flow are more common.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.