EPS (earnings per share) is a company's profit divided by its number of shares. The P/E (price-to-earnings) ratio is the share price divided by EPS. How many rupees you pay for each rupee of annual profit. Book value is the company's net worth (assets minus liabilities), usually quoted per share.
These three numbers are the starting kit of fundamental analysis, reading a business through its accounts rather than its chart. They tell you about value per share, which is a different thing from company size, for that, see what is market capitalisation, and what are large-cap, mid-cap and small-cap stocks.
Let's work through one company
Vikram is studying Himalaya Agro, a fictional company. From its latest annual results:
| Item | Figure |
|---|---|
| Net profit for the year | ₹200 crore |
| Total shares issued | 10 crore |
| Current market price | ₹500 |
| Net worth (assets − liabilities) | ₹1,200 crore |
EPS = ₹200 crore ÷ 10 crore shares = ₹20 per share. Each share "earned" ₹20 of profit this year.
P/E ratio = ₹500 ÷ ₹20 = 25. Buyers are paying ₹25 for every ₹1 of current annual profit. Loosely: if profits stayed frozen, it would take 25 years of earnings to add up to the price.
Book value per share = ₹1,200 crore ÷ 10 crore shares = ₹120. If the company sold everything and paid every debt, ₹120 per share would remain on paper. Dividing price by this gives the price-to-book (P/B) ratio: 500 ÷ 120 ≈ 4.2.
What does a high or low P/E mean?
A high P/E means the market expects profits to grow. Buyers pay up today for bigger earnings tomorrow. A low P/E means expectations are modest, or the market sees risk.
Neither is automatically good or bad:
- A P/E of 60 can be reasonable for a fast-growing business and absurd for a stagnant one.
- A P/E of 6 can be a bargain, or a warning that profits are about to shrink.
- P/E comparisons only make sense within an industry. Software companies and steel makers normally trade at very different P/E ranges, so comparing across them misleads.
Also check which EPS is used: trailing P/E uses the last 12 months' actual profit, while forward P/E uses estimated future profit. The same stock shows different numbers under each.
When is book value useful?
Book value anchors valuation for businesses whose worth sits in tangible assets and loan books, banks, manufacturers, infrastructure. A price far below book value can signal a bargain, but often signals that the market doubts the assets are worth their stated value.
For businesses built on brands, software or people, book value understates reality (their most valuable assets barely appear in the balance sheet) so a high P/B there is normal, not alarming.
One more wrinkle: EPS can be distorted by one-time items, like Himalaya Agro selling a factory for a one-off gain. A single year's EPS (and therefore P/E) can flatter or punish unfairly, so look at a few years together.
Things to keep in mind
- These ratios are lenses, not verdicts. A "cheap" P/E is not a buy signal and an "expensive" one is not a sell signal.
- Compare P/E and P/B against the company's own history and its industry peers, never across unrelated industries.
- EPS comes from accounting profit, which management choices and one-off items can swing; read the results, not just the ratio.
- Ratios describe the past and present; prices move on the future. See why stock prices move up and down. Never treat any single number as a recommendation.
Read next
What is the face value of a share? — One more number on the page — and the one most often mistaken for price.