Four numbers turn up on every stock page and in every annual report — face value, book value, price-to-book (P/B) and return on equity (ROE). On their own they're just figures. The real skill is knowing what counts as healthy, how to compare them with peers, and what today's number hints about tomorrow. This is the fuller guide. For learning only.
Face value: the sticker, not the price
Face value (or par value) is the nominal value assigned to a share — commonly ₹1, ₹2, ₹5 or ₹10 — and has almost nothing to do with the market price. A share with a ₹2 face value can trade at ₹2,000. It matters only as the base for dividends (a "200% dividend" means 200% of face value, not of price) and for stock splits. Ignore it when you're judging value.
Book value: the net worth behind a share
Book value per share = (everything the company owns − everything it owes) ÷ number of shares — the net worth attributable to each share on the balance sheet. More telling than the absolute figure is its trend: book value per share that grows steadily, year after year, is quiet evidence that the company is compounding real worth through retained profits, not just reporting paper earnings.
P/B: are you paying more or less than net worth?
Price-to-book = market price ÷ book value per share. A P/B of 1 means you're paying exactly book value; above 1 means the market expects the company to earn more than its assets alone suggest; below 1 can mean a bargain — or a troubled business.
What's an "ideal" P/B?
There is no single right number — it depends entirely on the kind of business:
| Business type | Typical P/B zone | Why |
|---|---|---|
| Banks, NBFCs, financials | ~1–3 | Loans and book value are the business, so P/B is the key gauge |
| Manufacturing, industrials | ~1–5 | Real, tangible assets back the value |
| Asset-light (IT, FMCG, brands) | often 5–15+ | Little physical capital; worth sits in brands, people and cash flows, so a "high" P/B means less |
A P/B below 1 is a genuine bargain only if the assets are real and the business is sound. Just as often it is the market warning that book value will be eroded by future losses — the classic value trap. (This is the mirror image of a misread P/E ratio.)
ROE: the quality engine
Return on equity = net profit ÷ shareholders' equity — how much profit the company generates on the owners' money. It is the single clearest measure of business quality.
What's a good ROE?
| ROE | What it usually signals |
|---|---|
| Below ~10% | Weak — may not even beat the cost of capital |
| ~12–15% | Decent and acceptable |
| ~15–20% | Strong — a quality business |
| Above ~20%, consistently | Excellent — a genuine compounder |
Two things matter more than the headline figure. Consistency — a steady 18% for ten years beats a one-year spike to 30%. And honesty — an ROE pumped up by heavy borrowing is fragile, so always read it next to the debt-to-equity ratio. High returns built on high debt can vanish the moment conditions turn.
The link that ties it all together: ROE drives P/B
Here is the insight that makes these ratios click. A high, durable ROE justifies a high P/B. A company earning 25% on equity is creating value quickly, so the market rightly pays several times book for it. A company earning 8% barely covers its cost of capital, so it deserves to trade near — or below — book value. That single relationship explains the combinations you'll see:
- High P/B + high ROE — usually fair. You're paying up for a quality compounder, not overpaying.
- Low P/B + low ROE — usually a trap, not a bargain. It's cheap because the business is poor.
- Low P/B + high and improving ROE — the rare, genuine opportunity worth real study.
- High P/B + falling ROE — the dangerous one: paying a premium for quality that is quietly fading.
How to compare with peers (the step most people skip)
A ratio in isolation means almost nothing. Always judge it three ways:
- Against direct peers in the same sector and roughly the same size. A bank's P/B only makes sense beside other banks'; comparing it to an IT firm's is meaningless.
- Against the company's own history. Is today's P/B or ROE high or low versus its typical five-year range? A stock trading well above its own historical P/B is pricing in a lot of optimism.
- Against the sector median, not the whole market. Each industry has its own normal band.
When a stock trades at a clear premium to its peers, make yourself answer why. A higher ROE, a cleaner balance sheet or faster, more durable growth can justify a premium. Nothing but hype does not — and that gap is exactly where overpaying happens.
Reading the present — and the future
These ratios describe the past and present, but investing is about what comes next. Use them as starting questions, not conclusions:
- Is ROE rising or falling? The direction often matters more than the level. Improving ROE frequently comes before a re-rating; falling ROE is an early warning the market may not have priced in yet.
- Is book value per share compounding? Steady growth is quiet proof of a durable, cash-generating business.
- Is the P/B justified by future ROE, not just past? A high P/B is a bet that high returns will continue. Ask what could break that — new competition, regulation, a fading moat.
- Are the numbers clean? Strip out one-off gains, asset revaluations and accounting quirks. A ratio built on a one-time profit will quietly mislead you.
The limits to remember
Book value and P/B understate asset-light businesses — a great software or consumer brand carries most of its worth off the balance sheet — and can be distorted by intangibles, revaluations and buybacks. ROE can be flattered by debt or by share buybacks that shrink the equity base. So treat all four as a screen and a set of questions, never a verdict on their own.
Read these numbers together, always against peers and the company's own history, and always asking where they go next. For the wider checklist see how to filter winning stocks and the P/E ratio explained. A disciplined, rule-based process — the basis of our Model Portfolio — applies exactly this kind of multi-factor, peer-relative judgement instead of fixating on any single number.
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