What Are P/E and P/B Ratios in Stocks and Other Assets?

P/E (Price-to-Earnings) and P/B (Price-to-Book) ratios are two of the most commonly used valuation metrics in financial analysis. They help compare a company‘s market price to its financial fundamentals, providing insight into whether a stock appears expensive, cheap, or fairly valued relative to peers or historical norms.

These ratios primarily apply to stocks but have analogs or limited use in other asset classes like real estate or certain funds. Below, we explain each ratio’s definition, calculation, interpretation, and applications. This article is not for financial advice, only some information in the past gathered and explained.

What Is the P/E Ratio?

In general, The Price-to-Earnings (P/E) ratio measures how much investors are willing to pay per dollar of a company’s earnings.

Calculation

P/E = Current Stock Price ÷ Earnings Per Share (EPS)

Trailing P/E — Uses EPS from the past 12 months (actual reported earnings).
Forward P/E — Uses estimated EPS for the next 12 months (based on analyst forecasts).

Interpretation

High P/E — Often indicates growth expectations (investors pay a premium for future earnings) or possible overvaluation.
Low P/E — May suggest undervaluation, mature/slow-growth companies, or concerns about future profitability.
Negative P/E occurs when a company reports losses (EPS < 0); not meaningful for comparison.

The S&P 500‘s average historical P/E is around 15-20, though it reached 30+ in late 2025 amid tech-driven markets.

P/E is most useful when comparing companies in the same industry, as sectors vary widely (tech often >30, utilities <15).

What Is the P/B Ratio?

The Price-to-Book (P/B) ratio compares a company’s market price to its book value (net asset value).

Calculation

P/B = Current Stock Price ÷ Book Value Per Share

Book Value Per Share = (Total Assets – Total Liabilities) ÷ Outstanding Shares
(Sometimes excludes intangibles like goodwill for “tangible book value.”)

Interpretation

P/B > 1 — Market values the company above its accounting net assets (common for growth or intangible-heavy firms).
P/B < 1 — Market prices below book value; may indicate undervaluation or distress (assets worth more if liquidated).
P/B around 1-2 — Typical for many mature companies.

P/B is especially relevant for asset-heavy industries (banks, insurance, real estate) where balance sheets reflect tangible value.

Variations and Related Metrics

PEG Ratio (P/E to Growth) — Adjusts P/E for expected earnings growth: PEG = P/E ÷ Annual EPS Growth Rate (%). PEG <1 often seen as attractive.
Price-to-Tangible Book — Excludes intangibles; useful for tech or brands with high goodwill.

Application to Other Assets

While P/E and P/B originated for stocks, analogs exist elsewhere:

Real Estate/REITs — P/B commonly used (market price vs. net asset value of properties). P/E analogs like Funds From Operations (FFO) yield.
Bonds/Fixed Income — No direct P/E (bonds have yields, not earnings). Inverse concepts like earnings yield (1/P/E) compare to bond yields.
Commodities — No earnings or book value; valuation via futures curves, inventory levels, or cost of production—not P/E or P/B.
Private Equity/Closed-End Funds — Trade at premiums/discounts to Net Asset Value (similar to P/B).

Limitations

P/E — Ignores debt, growth rates, and accounting differences; useless for loss-making companies.
P/B — Understates intangibles (brands, patents); less relevant for service/tech firms.

Both ratios are snapshots—best used with other metrics (e.g., ROE, debt levels) and industry context.

P/E and P/B provide quick ways to gauge relative valuation across stocks and certain assets. They reflect market sentiment toward earnings power (P/E) or underlying assets (P/B), helping frame discussions on company pricing in various sectors.