What P/E and P/B compare
P/E and P/B are often the first valuation ratios new investors encounter. Neither ratio is a standalone score for deciding whether a stock is cheap or expensive. They are starting points for comparing a market price with other company figures.
How to read P/E
The P/E ratio compares a share price with earnings per share. It describes how much the market is paying for a unit of current earnings. A company with strong growth expectations can trade at a high P/E, while a cyclical company can have a low P/E even when its earnings are temporarily elevated.
How to read P/B
The P/B ratio compares a share price with book value per share. It can be useful when assets and balance-sheet quality are important, but book value does not automatically show how effectively those assets generate profits. Debt, asset quality, and returns still need to be reviewed.
Compare context and trends
Use both ratios within the same industry and compare several years rather than relying on one period. Also check whether one-time gains or accounting changes have distorted the earnings or book-value figures.
Use ratios as questions
P/E and P/B are tools for forming better questions, not automatic buy signals. The next question is why the market assigns that valuation and whether the company can sustain the earnings and asset quality behind it.