Summary : EPS, PE Ratio, and PB Ratio are basic financial terms used to understand how a company is performing and whether its stock is expensive or cheap. EPS shows how much profit a company earns per share. The PE Ratio helps investors understand how much they are paying for those earnings. The PB Ratio compares a company’s market value with its actual book value. Together, these three ratios help investors make better decisions before buying a stock.
What Is EPS, PE Ratio, and PB Ratio
When people start learning about the stock market, they often hear terms like EPS, PE Ratio, and PB Ratio. At first, these words may sound confusing, but they are actually very simple once explained properly. These ratios help investors judge a company’s profit, value, and price in an easy way.
Let’s understand each one step by step.
What Is EPS?
EPS stands for Earnings Per Share. It tells you how much profit a company makes for each share.
In simple words, EPS shows how profitable a company is. If a company earns more profit, its EPS usually goes up. A rising EPS over time is often a good sign because it shows the business is growing.
For example, if a company earns ₹100 crore in profit and has 10 crore shares, its EPS will be ₹10. This means the company earns ₹10 for every share.
Why EPS Matters
EPS helps investors compare companies easily. A higher EPS usually means better profitability. However, EPS should always be checked over several years, not just one year, to understand real growth.
EPS alone is not enough to decide whether a stock is good or bad, but it is an important starting point.
What Is PE Ratio?
PE Ratio stands for Price to Earnings Ratio. It tells you how much investors are willing to pay for every ₹1 of a company’s earnings.
In simple terms, PE Ratio shows whether a stock looks expensive or cheap compared to its earnings.
The formula is simple:
PE Ratio = Share Price ÷ EPS
For example, if a company’s share price is ₹200 and its EPS is ₹10, the PE Ratio will be 20. This means investors are paying ₹20 for every ₹1 of earnings.
How to Understand PE Ratio
A high PE Ratio means investors expect strong future growth, but it can also mean the stock is expensive. A low PE Ratio may indicate the stock is cheap, but it can also signal slow growth or business problems.
That’s why PE Ratio should be compared with:
- Other companies in the same industry
- The company’s past PE levels
What Is PB Ratio?
PB Ratio stands for Price to Book Value Ratio. It compares the market price of a share with the company’s actual book value.
Book value is the value of a company’s assets after paying all liabilities. PB Ratio helps investors understand how much they are paying compared to what the company is actually worth on paper.
For example, if a stock is trading at ₹300 and its book value per share is ₹150, the PB Ratio will be 2.
When PB Ratio Is Useful
PB Ratio is especially useful for banks, PSU companies, and asset-heavy businesses. A PB Ratio close to 1 may indicate that the stock is fairly valued. A very high PB Ratio can mean the stock is expensive, while a very low PB Ratio may suggest undervaluation or business issues.
How EPS, PE, and PB Work Together
EPS shows profit, PE shows price compared to profit, and PB shows price compared to value. None of these ratios should be used alone.
A good stock usually has:
- Stable or growing EPS
- Reasonable PE compared to peers
- Healthy PB ratio based on its business type
Using all three together gives a clearer picture.
Final Thoughts
EPS, PE Ratio, and PB Ratio are basic but powerful tools for stock market investors. They help you understand how much a company earns, how the market values those earnings, and whether the stock price matches the company’s actual value.
For beginners, learning these three concepts is an important first step before investing in any stock.