When The Market Price Lies – Check The Book Value
In my previous blog, we discussed how to analyse a stock through its earnings, PE and PEG – the core pillars of fundamental analysis.
Now, let’s take one step further and understand another crucial measure – how to value a share based on its Book value and PB ratio.
This method helps you knowing whether you are paying too much for a company’s assets or picking up genuine value at a discount.
Book Value represents the net worth of a company– that is, what remains for shareholders after paying all liabilities.
Book Value =
Total Assets – Total Liabilities
To find, Book Value per Share(BVPS), divide that by the total number of outstanding shares.
For example, if a company has assets worth ₹10,000 crore and liabilities of ₹4,000 crore, its book value is ₹6,000 crore.
If there are 60 crore shares, then the book value per share = ₹100.
This ratio works best for asset-heavy business such as banks, NBFC, cement, steel or manufacturing companies – where tangible assets play a major role.
It’s less effective for service- based or technology firms, where intangible assets like brand, software or patents matter more.
PB ratio =
Market Price per share/BV per share
Why does this matter? Because the PB ratio tells us how much the market is willing to pay for each rupee of net assets. A PB of 2 means you paying ₹2 for every ₹1 of net asset value. If PB is below 1, it suggests that the stock is trading for less than the company’s net asset value – a potential value-investing signal ( though by no means a guarantee).
Low PB isn’t enough :
A low PB in a weak-return company may be a trap; a modest PB in a high-return company may be a steal.
A low PB might mean undervalued or it might reflect problems: weak profitability, heavy debt, or loss of business. So, please note that a low PB ratio must be supplemented by a healthy ROE (Return on Equity) to validate value.
Book Value doesn’t always reflect current market value of assets, or the value of intangible assets like brand, patents etc. So, the book value may be misleading.
As we know that financial accounting is based on the historical cost. In simple terms, suppose you bought a shop at ₹40 lacs in 2020 to start your business. Other fixed and current assets were ₹10 lacs. No Loan or liability. So, book value is your total assets which is ₹50 lacs. Sole proprietor business. So, you don’t have to divide your book value to get the bvps.
But, now in 2025, the current market value of your shop is, say, ₹80 lacs. Assume, you have been drawing the entire profit to run your family. No reserves created. No liability created. No changes happened. You are still showing the shop as ₹40 lacs in your balance sheet. Net result: Your book value remains the same. But in reality if you revalue your asset and show the true figure (by creating a Revaluation Reserve) your Total Assets will be increased by ₹40 lacs. Book Value now = ₹90 lacs.
Imagine, this was a company form of business. Initial Capital would have been ₹50 lacs (Capital or Networth = Asset- Liability). Assuming face value @₹10 per share, there would be 5 lakh shares. Initially your face value and book value are the same. (BV= Networth/No of shares = 50/5 =10). But, today the actual book value is ₹90 lakhs/5 lakhs = 18. So, the value per share has gone up by 1.8 times.
And, now, say, your company’s share is being sold at ₹27, which means the Price to Book ratio is 27/18 = 1.5.
So, while analyzing, always look beyond the numbers – because balance sheets, too, have hidden stories to tell.
- In today’s blog, I’ll be sharing several real-life examples.The data and information I refer to are easily accessible– just a click away on the internet. Our task is to interpret and analyse these insights thoughtfully, as per the context and need. Source: Screener.
Let me start with IHCL (Taj Hotel, Tata Group) and EIH ( Oberoi Group).
IHCl. EIH.
M- Cap. ₹1,04,992 cr. ₹24,095 cr.
Face Value. 1. 2
Book Value. 78. 73.8
PE. 61. 30.7.
PB. 9.41. 5.22
ROE. 16.1% 18%
ROCE. 17.2% 23.4%
You are comparing Indian Hotels Company Ltd.(IHCL) with EIH ltd.(Oberoi Hotels) :
Clearly the market is willing to pay almost double for IHCL on both book value and earnings. Here’s why:
IHCL has a wider presence across India and abroad including premium luxury business hotels, and resorts with strong brands like Taj, Vivanta, Gateway, Ginger, Selections etc.
Oberoi is more niche – ultra – luxury, fewer properties.
The higher value given to IHCL is primarily due to brand power, Tata trust, growth potential ( you’ll find news about new hotels coming up almost every week – it’s happening quite regularly), liquidity and market sentiments, not just current earnings or book value.
But, please note, as an individual, you don’t have to follow the crowd. Yes, as a value investor, EIH could be attractive. Lower PE & PB : you are paying less per unit of earnings and book value. Both ROCE and ROE are better. If the market eventually recognizes EIH’s strength, the stock could rerate.
Let’s take another example. Union Bank of India from the banking sector and Shriram Finance, an NBFC.
UBI. Shriram F.
Market Cap. 1.08,260 cr. 1,34,499 cr
52 w high/low. 159/101. 724/493
PE. 5.75. 15.18
PB. 0.95. 2.4
Div yield. 3 35% 1.38%
ROCE. 6.72% 11%
ROE. 17% 15 6%
FV. 10. 2. 2
So, purely on value metrics, yes – UBI looks cheaper. But, a low PE or PB alone doesn’t always mean ‘undervalued.
Shriram Finance is a well-managed NBFC with consistent growth and strong asset quality ( low NPAs). It focuses on secured retail lending – vehicles, MSMEs. Investors reward consistency, governance, quality with higher PE & PB.
Union Bank on the other hand:
Is a public sector bank(PSB) with improving performance but historically weaker capital efficiency and moderate asset quality.
PSB, usually trade at discounted valuations because of lower ROE and perception of government interference.
But when you compare Shriram Finance with its Peer like Bajaj Finance, Cholamandalalm Investment and L & T Finance – you will find it cheaper. Bajaj Finance PE and PB (39 & 7), Chola(33 & 6.16), and L& T Finance ( 25 & 2.5) as against Shriram’s 15.8 and 2.4. Overall it looks attractive in its category. Last Friday it made a new high of 724 and my personal view is it will keep creating new highs.
In the short run, as a value-based investor, my opinion on UBI is, there is limited downside risk at market price of less than the book value. UBI may give faster upside if re-rating continues. Re -rating depends on improving NIMs, credit growth >12%, strong quarterly results and NPA levels below 2%
As a long term compounding investor, Shriram has more predictable, steady growth with a proven management track record.
Let’s look at Abbott India and Aurobindo Pharma.
Abbott India is MNC subsidiary of Abbott Labs, USA. Aurobindo Pharma is Indian -owned global generic manufacturer.
Abbott India‘s revenue come 100% from India only. Aurobindo earns 80% from exports.
Abbott PE and PB, 45 and 15, whereas Aurobindo’s 15 and 2.
Abbott India reflects quality at a premium. Extremely stable MNC with strong brands ( Digene, Prudently, Thyronorm, Duphaston).
Aurobindo shows values and cyclicality.
Abbott is like a “Pharma HDFC Bank” – premium, stable low risk.
Aurobindo is like a “Pharma PSU to private re-rating story” – cheaper, cyclical, more volatile but higher upside potential.
One interesting observation here is, not all expensive stocks are costly. In June 2025, MRF share of ₹10 face value was trading at ₹1,35,000! Now, today, it is ₹1,60,000. So, definitely, it was not expensive in June. Whether, the current price of ₹1,60,000 is cheap or costly– that remains to be seen. I could dive into analysis of this stock, but it would make the blog quite a bit longer.
Beyond PE & PB
While the PE and PB ratios are two of the most popular lenses to assess a stock’s valuation, they don’t capture the entire picture. A company’s market price is also shaped by factors such as revenue growth over time, orders in hand, capital expenditure plans (capex), and changes in promoter shareholding. The level of FII and DII participation, the size of equity capital, developments like new patents collaborations market expansion, or product innovation often indicate future potential.
Equally important are the profitability and return metrics – like return on investment (ROI), return on capital employed (ROCE), and dividend yield which reflect how efficiently the business is using its capital.
Broader macro – economic cues, including interest rate trends government policies, tax benefits, subsidies and even buyback offers can also influence valuations and investor sentiments.
Thus, while PE and PB offer a solid foundation to judge a stock appears expensive or undervalued, a truly informed investor always goes beyond these and looks at a broader business and economic landscape before making a decision.
Valuation isn’t just about numbers – it’s about understanding the story behind them. Market reward clarity, consistency and conviction. It transfer wealth from the impatient to the patient. True wealth is built by those who allow time and compounding to work quietly. Prices change every day, but value evolves with time. Market test our patience more than our skill. Stay curious, stay disciplined, stay invested.
Disclaimer: The information provided in the blog is for educational and informational purposes only and should not be construed as financial advice. Readers are encouraged to consult a qualified financial advisor before making any financial decisions. All views expressed are personal.
