Corporate Valuation Basics — P/E Ratio, EPS, Book Value & More

Introduction: Why Company Valuation Matters

Before you invest in a stock, you’re essentially buying a piece of a business.
But how do you know if that piece is fairly priced, overvalued, or undervalued?
That’s where corporate valuation metrics come in — numbers that reveal how the market views a company’s performance, profit potential, and financial health.

Let’s decode the most important ones ..

1. P/E Ratio (Price-to-Earnings Ratio) — The Popular Yardstick

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

What it means:

• It shows how much investors are willing to pay for ₹1 of a company’s earnings.

• High P/E = investors expect strong future growth.

• Low P/E = the stock may be undervalued or facing weak growth.

Example:
If a company’s stock trades at ₹500 and its EPS is ₹25,
P/E = 20.
That means investors are paying ₹20 for every ₹1 of earnings.

Pro Tip:
Compare P/E with peers in the same sector. A high P/E in IT may be normal, but alarming in manufacturing.

2. EPS (Earnings Per Share) — The Profit Indicator

Formula:
EPS = Net Profit ÷ Total Number of Shares Outstanding

What it means:

• EPS shows how much profit a company makes for each share.

• Higher EPS = better profitability.

• Falling EPS = weak growth or rising costs.

Example:
If a company earns ₹100 crore and has 10 crore shares,
EPS = ₹10.

Watch out:
One-time gains can inflate EPS — always check consistent earnings across years.

3. Book Value — The Asset Reality Check

Formula:
Book Value per Share = (Total Assets – Total Liabilities) ÷ Total Shares

What it means:

• It represents the net worth of the company per share based on accounting records.

• If the market price is much higher than book value → investors expect high future growth.

• If it’s close to or below book value → the stock may be undervalued.

Example:
If a company has ₹1000 crore in assets and ₹400 crore in liabilities, with 10 crore shares:
Book Value = ₹60/share.

Pro Tip:
For financial or manufacturing companies, book value is a strong indicator. For tech companies, less so.

4. P/B Ratio (Price-to-Book Ratio) — Market’s Trust in Assets

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

What it means:

• Tells you whether investors believe the company’s assets are worth more (or less) than the books show.

• P/B < 1 → undervalued or asset-heavy business.

• P/B > 3 → high market confidence or overvaluation.

Example:
Stock price ₹120, book value ₹60 → P/B = 2.
The market values the company at 2× its book value.

5. Dividend Yield — Reward for Shareholders

Formula:
Dividend Yield = (Dividend per Share ÷ Market Price per Share) × 100

What it means:

• Measures cash return investors get from owning the stock.

• High yield = stable, mature company.

• Low yield = company reinvesting profits for growth.

Example:
If a company pays ₹5 dividend on a ₹100 stock, yield = 5%.

6. Debt-to-Equity Ratio — The Financial Stability Test

Formula:
Debt-to-Equity = Total Debt ÷ Shareholder’s Equity

What it means:

• Measures how much of the company’s operations are financed by borrowed money.

• D/E < 1 → financially healthy.

• D/E > 2 → risky and leveraged business.

Tip:
Compare across similar industries — capital-heavy sectors like infrastructure often have higher ratios.

7. ROE (Return on Equity) — Efficiency in Earning Profits

Formula:
ROE = (Net Income ÷ Shareholder’s Equity) × 100

What it means:

• Shows how efficiently the company uses shareholder money to generate profits.

• ROE between 15–20% is usually considered strong.

Example:
If a company earns ₹30 crore profit with ₹150 crore equity,
ROE = 20%.

8. EV/EBITDA — The Real Value Ratio

Formula:
EV/EBITDA = Enterprise Value ÷ Earnings Before Interest, Taxes, Depreciation & Amortization

Why it matters:

• EV/EBITDA is a debt-adjusted P/E ratio — helps compare companies with different debt levels.

• Lower EV/EBITDA = potentially undervalued.

• Higher = growth expectations priced in.

Conclusion: Numbers Tell a Story — If You Know How to Read Them

Valuation is not just about numbers — it’s about understanding the story behind those numbers.
Combine multiple ratios, compare with peers, and always analyze industry trends, management quality, and financial consistency.

That’s how you identify not just a stock — but a valuable business.