P/E, P/B, ROE, ROCE Explained Simply (with Indian Stock Examples)

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In short: Four financial ratios — P/E (Price to Earnings), P/B (Price to Book), ROE (Return on Equity), and ROCE (Return on Capital Employed) — answer 80 percent of the basic questions every stock investor asks: is this stock cheap or expensive, and is the company actually good at making money? This guide explains each ratio simply, shows how to calculate them with real Indian stock examples, and covers the traps that mislead beginners (a low P/E is not always cheap, a high ROE is not always good). Use these as your starting toolkit for fundamental analysis.

Why these four ratios?

Stock analysis can use dozens of ratios — P/S, EV/EBITDA, debt-to-equity, current ratio, dividend yield, working capital turnover. Most are situation-specific. The four covered here are the universal starting points:

• P/E answers: how expensive is this stock relative to its profits?
• P/B answers: how expensive is this stock relative to its book value (net assets)?
• ROE answers: how efficiently does the company turn shareholder money into profit?
• ROCE answers: how efficiently does the company use all capital (equity + debt) to generate profit?

Read together, these four tell you whether the stock is reasonably priced AND whether the underlying business is good. A great business at a fair price is the goal. A great business at a high price (high P/E, high ROE) or a mediocre business at a low price (low P/E, low ROE) are both common traps.

Ratio 1: P/E (Price to Earnings)

Formula: P/E = Market Price per Share / Earnings per Share (EPS)

What it means: The number of years of current earnings you are paying for, if profits stay flat forever. A P/E of 25 means investors are willing to pay 25 times annual earnings for the stock.

Example: TCS trades at ₹4,200. Annual EPS (FY 2025-26) is ₹140. P/E = 4,200 / 140 = 30.

This means buying TCS at ₹4,200 is the same as buying a small business that earns ₹140 per share annually, for ₹4,200 per share — payback in 30 years assuming earnings stay constant. The implicit assumption is that earnings will grow, justifying the high multiple.

What is a “good” P/E?

There is no universal answer. Context matters:

Practical rule: Compare a stock’s P/E to its sector average and to its own 5-year historical range. HDFC Bank at P/E 18 might be reasonable (sector average ~18). At P/E 30, it would be expensive even relative to its history.

The P/E trap — when low P/E is a warning

A very low P/E (under 10) can signal undervaluation or it can signal a problem:

• True undervaluation: Market has missed something. Cigarette companies in 2018-2020 (P/E ~20 when sector was 40) ended up being right calls — quality returns came back.
• Value trap: Low P/E because earnings are about to collapse. Coal India in 2014-2017 (P/E 7-9) seemed cheap, but ESG concerns and renewable energy transition kept it cheap for years.

Always ask: why is the P/E low? If the answer is “the market hasn’t noticed yet,” that is rare. More often, the market has noticed something concerning.

Forward P/E vs Trailing P/E

Trailing P/E: Uses last 12 months actual reported earnings. Backward-looking, reliable.

Forward P/E: Uses next 12 months estimated earnings (analyst forecasts). Forward-looking, subject to revision.

For high-growth stocks, forward P/E is more relevant (e.g., Zomato’s trailing P/E was 1500+ when it just turned profitable; forward P/E was 60-70). For mature businesses, trailing P/E is fine.

Ratio 2: P/B (Price to Book)

Formula: P/B = Market Price per Share / Book Value per Share

Book Value per Share = (Total Equity − Preferred Equity) / Number of Shares Outstanding. It is essentially the net worth of the company divided by shares — what you would theoretically get if the company sold all assets, paid off all liabilities, and distributed the rest.

Example: ICICI Bank trades at ₹1,200. Book value per share is ₹400. P/B = 1,200 / 400 = 3.0.

This means the market values ICICI Bank at 3x its accounting net worth — paying ₹3 for every ₹1 of book value. The 2x premium reflects expected future earnings power beyond what is on the balance sheet today.

Where P/B is most useful

P/B is most meaningful for asset-heavy businesses where book value is a reasonable measure of intrinsic value:

• Banks — book value reflects the loan book and deposits. PSU banks often trade at P/B around 0.8-1.5; private banks at 2-4.
• Insurance companies — book value reflects investment portfolio.
• Real estate developers, infrastructure, capital goods — tangible assets dominate.

P/B is less useful for asset-light businesses like IT services or pharma, where most value lies in IP, brand, and customer relationships (not on the balance sheet). Tata Consultancy Services has P/B around 15 because its real value (consulting capability) is not on the balance sheet — book value massively underestimates intrinsic worth.

The P/B trap

Banks with P/B under 1.0 might look cheap, but the catch is asset quality. If the loan book has hidden NPAs (non-performing assets) not yet recognised, the “book value” is overstated. Yes Bank in 2019 had P/B around 1.5 — within months it was 0.3 after the RBI mandated recognition of hidden bad loans.

Always cross-check P/B against quality metrics: ROE (next ratio), NPA disclosures, provision coverage ratio.

Ratio 3: ROE (Return on Equity)

Formula: ROE = Net Profit / Average Shareholders’ Equity × 100

This is the most direct measure of how good a business is at making money from the capital shareholders have invested. If you put ₹100 of equity into a business, ROE of 20% means it generates ₹20 of profit per year.

Example: Hindustan Unilever has shareholders’ equity of around ₹9,500 crore. Net profit for FY 2025-26 is ₹10,800 crore. ROE = 10,800 / 9,500 = 113% (extremely high because HUL barely needs equity — it operates with strong working capital).

Asian Paints: ROE ~28-32%. ITC: ROE ~25%. Both reflect excellent businesses.

HDFC Bank: ROE ~17-18%. Solid for a bank, where capital adequacy rules force banks to hold more equity than other businesses.

Reliance Industries: ROE ~9-11%. Lower because Reliance operates in capital-intensive businesses (refining, telecom).

What is a “good” ROE?

The ROE trap — high ROE through high debt

ROE can be artificially inflated by leverage. If a company has very little equity and lots of debt, even modest profits look amazing on ROE. Real estate developers and some financial firms manipulate this.

Example: A company has ₹100 equity and ₹900 debt, earning ₹40 profit. ROE = 40/100 = 40% (looks great). But the debt makes the business risky — small drop in revenue can wipe out equity.

Solution: cross-check with ROCE (next), which factors in debt.

Ratio 4: ROCE (Return on Capital Employed)

Formula: ROCE = EBIT (Earnings Before Interest and Tax) / Capital Employed × 100

Where Capital Employed = Total Equity + Long-term Debt (essentially all the long-term capital the business uses, both shareholder and lender).

ROCE answers: how efficiently does the business use ALL its capital? Unlike ROE which counts only equity, ROCE includes debt — so a leveraged business cannot game it.

Example: Asian Paints — total capital employed ~₹12,000 cr, EBIT ~₹4,200 cr. ROCE = 4,200/12,000 = 35%.

This is exceptional and reflects pricing power (premium paint brand) and asset-light distribution.

What is a “good” ROCE?

The benchmark: ROCE should be meaningfully higher than the company’s cost of debt (typically 8-10 percent in India 2026). If a company’s ROCE is 12 percent but it borrows at 11 percent, the business creates only marginal value over the cost of capital.

Reading the ratios together — a checklist

Looking at any stock, ask:

1. P/E: Reasonable vs sector and own history?
2. P/B: Reasonable for the business type (high for asset-light, lower for asset-heavy)?
3. ROE: Above 15% consistently for 5+ years?
4. ROCE: Above 15% consistently, and meaningfully higher than borrowing cost?
5. Trend: Are these improving, stable, or deteriorating over the last 5-10 years?

A stock that scores well on all five is almost always a quality business. A stock that scores poorly on multiple is worth deeper investigation before buying.

Where to find these ratios for Indian stocks

• Screener.in — free, comprehensive financial data for all Indian listed companies. Pre-calculated ratios. Best single resource.
• Tijori Finance — clean visualisations of ratios over time.
• Trendlyne — historical ratio bands.
• Broker research pages (Zerodha Pulse, Dhan, Groww) — show key ratios on stock pages.
• NSE/BSE official pages — current ratios.
• Annual report — calculate from raw data yourself. Tedious but accurate.

Real example: comparing two Indian stocks

Suppose you are comparing Infosys (large-cap IT) and Hindustan Unilever (large-cap FMCG) in mid-2026:

Read together: HUL is a higher-quality business (better ROE, ROCE) but is priced for that quality. Infosys is also high quality and priced more reasonably. Neither is “wrong” — both are quality stocks. The question is whether the premium for HUL is justified by future growth expectations.

This kind of comparison is what these ratios enable. A pure P/E comparison would lead you to wrongly conclude HUL is overvalued. Reading P/E with ROE shows HUL deserves its premium because of capital efficiency.

Limitations of all four ratios

• Backward-looking: Based on past financials, not future performance
• Sector blind: Comparing P/E across sectors (banking vs FMCG) is meaningless
• Accounting choices: Companies can manipulate earnings via depreciation policy, inventory accounting, etc.
• Cyclical traps: Cyclical industries (steel, auto) show artificially low P/E at peak earnings, high P/E at trough — opposite of intuitive
• Excludes qualitative factors: Management quality, regulatory risk, competitive dynamics not captured

Use these ratios as the starting point, not the conclusion. Always supplement with:

• Reading the latest annual report (especially Management Discussion and Analysis)
• Tracking quarterly earnings and management commentary
• Understanding competitive position vs peers
• Sectoral and regulatory context

Frequently Asked Questions

Should I avoid stocks with high P/E?

Not automatically. High P/E often reflects high expected growth or strong quality. Asian Paints has traded at P/E 60-80 for decades and rewarded investors handsomely. The question is whether the high P/E is justified by sustainable growth.

What is PEG ratio and how does it relate to P/E?

PEG = P/E divided by expected earnings growth rate. A PEG below 1 is considered attractive. Example: P/E of 30, growth of 25% gives PEG = 1.2, suggesting reasonable valuation relative to growth.

Why do some companies have negative ROE?

A negative ROE means net profit is negative (loss). The company is destroying shareholder equity. New-age tech IPOs (Paytm, Zomato early years) had negative ROE while burning cash to acquire customers. Some recover; many do not.

Is ROE higher than ROCE always a problem?

Not always. ROE higher than ROCE means the company is using debt to amplify equity returns. Up to moderate debt levels (D/E ratio under 1), this is healthy financial engineering. Beyond that, financial risk rises.

What about dividend yield?

Dividend yield = Annual dividend per share / current price. Useful for income-focused investors. High yield (5-8%) can signal value but also signal that growth is slowing. Most growth-focused companies in India pay 1-2 percent dividend yield; PSU banks and FMCG mature names pay 3-5 percent.

Where should beginners start with fundamental analysis?

Pick 5 Indian large-cap stocks you already know (HDFC Bank, Reliance, TCS, ITC, Asian Paints). Look up their 5-year P/E, P/B, ROE, ROCE on screener.in. Notice patterns. Then compare against 5 mid-caps or small-caps in the same sectors. After 10-20 such comparisons, the ratios become intuitive.

Sources & Further Reading