Part 7 · Connecting the economy to stocks · Lesson 37
P/E and P/B: rulers for measuring expensive vs. cheap
Even at the same stock price, you only see whether it is expensive or cheap by comparing with earnings and assets. Take the two rulers, P/E and P/B, and measure the market.
QToday's question
A stock with a P/E of 5 and one with a P/E of 25: which one is the 'cheap' stock?
Open a brokerage app and every stock has P/E and P/B numbers attached. People say a low number means cheap and a high number means expensive, but is it really that simple? If you learned 'stock price = earnings × multiple' in Lesson 1, in this lesson you take in hand the ruler that measures that multiple and use it yourself.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
We bring back 'stock price = EPS × P/E' from Lesson 1 and the rule of thumb 'P/E ≈ 1 ÷ (required return − growth rate)' from Lesson 17. The bank story from Lesson 18 and the Macro Map from Lesson 36 are also connected at the end.
- STEP 1 · Basic conceptsTwo rulers for measuring price
You can calculate and yourself, and explain whether each compares price with 'earnings' or with 'assets'.
- STEP 2 · Understanding the mechanicsP/B = P/E × ROE, and interest rates
You can explain that ROE is the bridge connecting P/E and P/B, and why the fair multiple falls when interest rates rise.
- STEP 3 · Real-world applicationThe US P/E, Korea's P/B
You can read the S&P 500 forward P/E and the KOSPI P/B together with interest rates, earnings and institutions, and avoid declaring something 'cheap' from a single number.
STEP 1Two rulers for measuring price
'Expensive' and 'cheap' are words that only make sense when compared with something. In stocks, we compare with two things: earnings and assets.
P/E: price compared with earnings
In Lesson 1 you learned that (price-earnings ratio) is the multiple the market puts on earnings. The calculation is simple. Divide the stock price by , the earnings one share makes in a year. A P/E of 10 can be read as 'if current earnings continue, you are paying ten years of earnings'.
Flipping P/E upside down, 1 ÷ P/E, gives the . At a P/E of 10 the earnings yield is 10%, and at a P/E of 25 it is 4%. This number is handy to compare side by side with deposit or government bond rates. For the same reason that bakery prices fell when bank rates rose in the bakery analogy of Lesson 1, when interest rates rise, investors demand a higher earnings yield from stocks too, that is, a lower P/E.
P/B: price compared with assets
The second ruler is (price-to-book ratio). Net assets (equity), what remains of a company's property after subtracting debt, divided by the number of shares is (book value per share), and the stock price divided by BPS is P/B. A P/B of 1 means the stock price equals 'the book value of assets left over if the company were wound up now and its debts paid'.
An easy analogy · when taking over a neighborhood shop
When you want to buy a shop, you ask two questions. First, "How much does this shop earn in a year?" How many years of that profit you pay is the P/E. Second, "If I subtract debt from the ovens, inventory and cash in the shop, how much is left?" How many times that remaining property you pay is the P/B. A shop that does well sells for far more than the price of its fixtures, and a shop with no customers is lucky to get just the price of its fixtures.
Let's calculate it ourselves with a hypothetical Robin Electronics.
| Item | Value | Calculation |
|---|---|---|
| Stock price | KRW 20,000 | Price traded in the market |
| EPS (net income per share for one year) | KRW 2,000 | Net income KRW 20 billion ÷ 10 million shares |
| BPS (net assets per share) | KRW 16,000 | Net assets KRW 160 billion ÷ 10 million shares |
| PER | 10x | 20,000 ÷ 2,000 |
| PBR | 1.25x | 20,000 ÷ 16,000 |
An example built with a hypothetical company.
The result is the same whether you divide by the number of shares or calculate for the whole company. Divide a market cap of KRW 200 billion by net income of KRW 20 billion and the P/E is 10x; divide by net assets of KRW 160 billion and the P/B is 1.25x.
Quick checkA company has a stock price of KRW 30,000, EPS of KRW 1,500 and BPS of KRW 60,000. What are its P/E and P/B?
STEP 2P/B = P/E × ROE, and interest rates
Using the two rulers separately is confusing. In this step we lay down one bridge that connects them, and see how that bridge sways with interest rates.
The bridge connecting the two rulers: ROE
(return on equity) is net income divided by net assets. It is the 'money-making ability' that shows how many won a company earns in a year on 100 won entrusted by shareholders. Robin Electronics earned KRW 20 billion on net assets of KRW 160 billion, so its ROE is 12.5%. And when you put the definitions of P/E and P/B side by side, a very useful relationship appears.
What this formula says is clear. If the market puts the same P/E on two companies, the one that makes money better with its capital has the higher P/B. A company with an ROE of 20% has a P/B of 2x with just a P/E of 10x, while a company with an ROE of 5% gets only 0.5x even with a P/E of 10x. That is why, before celebrating that a P/B below 1 means 'selling for less than its property', you should first check what that company's ROE is.
See it in a picture: a three-number calculator
Move the stock price, EPS and BPS, or press a company type button. P/E, P/B and ROE change together, and an interpretation appears below.
P/B 1.25x = P/E 10.0x × ROE 12.5%
The numbers by company type are hypothetical examples to aid understanding, not real companies or industry averages.
Why the fair P/E falls when interest rates rise
In Lesson 17 you learned that, assuming earnings grow steadily, the fair P/E can be approximated as 'P/E ≈ 1 ÷ (required return − growth rate)'. The required return is the government bond yield plus the compensation for stock risk, so when the bond yield rises the denominator grows and the fair P/E falls. By the same principle, P/B can also be approximated.
For example, in a market with 2% growth and an 8% required return, a company with a 14% ROE has an approximate P/B of (14−2) ÷ (8−2) = 2x, and a company with a 5% ROE has (5−2) ÷ (8−2) = 0.5x. If the required return rises to 9%, they fall to about 1.7x and 0.43x respectively. A company whose P/B stays below 1x for a long time is quite likely being judged by the market as 'a company whose ROE does not exceed the return shareholders require'.
The growth rate, required return and ROE are hypothetical examples.
Common misconceptions
- "Is a stock with a low P/E a cheap stock?"
- Not necessarily. In industries where earnings ride a cycle, like the semiconductors seen in Lesson 3, the P/E looks lowest when earnings are at their peak and highest when earnings are at the bottom. When the market has already priced in falling earnings ahead and lowered the multiple, a low P/E can be a trap. This is called a .
- "Is a P/B below 1 always undervalued?"
- There is no guarantee that book net assets can actually be sold at that value, and with a low ROE a P/B below 1 can persist for a long time. Conversely, if shareholder returns or profitability improve, P/B can rise quickly.
- "Is a high P/E a bubble?"
- A high P/E can reflect expectations of fast earnings growth. If earnings really do grow quickly, the P/E falls even as the stock price rises. The problem is when earnings fail to keep up with expectations.
Quick checkWhat is the P/B of a company with a P/E of 8x and an ROE of 10%? What if it raises ROE to 15% with the P/E unchanged?
STEP 3The US P/E, Korea's P/B
Now let's hold the two rulers up against real markets. The US is often discussed in terms of P/E and Korea in terms of P/B, and we show the reason for that too.
S&P 500 forward P/E and the 10-year yield
Below is the S&P 500's published by FactSet, collected at key points in time. The US 10-year Treasury yield on the same date is placed alongside it. Tap a point.
S&P 500 forward 12-month P/E (bars) and US 10-year yield (line) at key points in time
Tap a point to see an explanation of that moment.
Source: forward P/E figures from FactSet Earnings Insight (published 2020-09-02, end of 2021 and 2022, 2025-04-08, 2025-09-30, 2025-10-29, 2026-06-30 and 2026-08-07); the 10-year average of 19.0x is from the 2026-08-07 report. The 10-year yield is the FRED DGS10 value for the same date (2026-08-07). Checked 2026-10-05.
Three scenes stand out. First, in 2022 things moved as the textbook says. While the 10-year yield rose from 1.52% to 3.88%, the forward P/E fell from 21.3x to 16.7x (Lesson 1). Second, in 2025 the P/E exceeded 23x even though yields stayed in the 4% range. FactSet noted that from April 8 to October 29, 2025, while the index rose 38.3%, forward EPS estimates grew 7.1%, and analyzed that price led the rise in the P/E. Beyond interest rates, growth expectations and investor sentiment lifted the multiple.
Third, in 2026 the opposite direction appeared. The index, which was 6,890.59 on October 29, 2025, rose about 12% to 7,709.96 on August 7, 2026, but the forward P/E fell from 23.1x to 20.0x. If the price rises and the multiple shrinks, it means earnings, the denominator, grew faster. Working backwards from the two numbers, forward EPS grew about 29%. FactSet put its 2026 full-year earnings growth forecast at 30.0%. In terms of the two knobs from Lesson 1, it is a case where 'the multiple shrank, but earnings grew by more, so the stock price rose'.
The forward EPS growth of about 29% is a value calculated by Robin Invest as (7,709.96 ÷ 20.0) ÷ (6,890.59 ÷ 23.1) − 1.
The Korea discount and the Corporate Value-up Program
When talking about the Korean stock market, P/B often comes up, because for a long time the P/B of many listed companies was below 1x. According to research citing Korea Exchange data, at the end of 2024 the average KOSPI P/B was 0.9x and KOSPI 200 was 0.8x, and 72% (518) of listed companies had a P/B below 1x. In the same comparison, the US was 4.8x, Taiwan 2.6x and Japan 1.5x. This phenomenon of receiving a lower multiple even for similar earnings is called the .
P/B comparison of benchmark indexes (end of 2024)
Source: paper presented to the Korean Securities Association (2025 research supported by KRX, citing Korea Exchange data). Based on the benchmark indexes of KOSPI 200, the US, Japan and Taiwan. Checked 2026-10-05.
Using the formula from STEP 2, the reasons split into two strands. Either ROE itself was low, or investors applied a higher required return even for the same ROE. For the latter, factors such as low shareholder returns, distrust of governance, and North Korea risk are mentioned. On February 26, 2024, the government announced the support measures, encouraging listed companies to disclose plans to improve P/B and ROE, and deciding to compare and publish P/B, P/E and ROE by market. In September 2026, the Korea Exchange said it would, in November, for the first time publish a list of some of the listed companies with a P/B below 1x (554 on KOSPI and 919 on KOSDAQ at the time).
The KOSPI topped 5,000 intraday in January 2026, but a September 2026 article also carried an analysis that the KOSPI's 12-month forward P/E had fallen to 5.1x. Since forward P/E is calculated from the earnings forecast for the next year, if the earnings forecast grows greatly, as with the memory prices seen in Lesson 31, the P/E can fall even as the stock price rises. Whether that low P/E means 'cheap' or reflects the market's doubt that 'these earnings will not last' has to be weighed again with the value trap question from STEP 2.
Source: Financial Services Commission Corporate Value-up Program support measures (2024-02-26, summarized in Law Firm Sejong newsletter 2024-02-28), Daum News 2026-09-14 (Korea Exchange plan to publish low-P/B list), Hankyoreh 21 2026-09-24 (KOSPI forward P/E 5.1x). Checked 2026-10-05.
In stocks: reading multiple news
| News | Which knob | First check |
|---|---|---|
| "S&P 500 forward P/E above its 10-year average" | Multiple | Where interest rates stand, and whether earnings forecasts are rising too |
| "P/E actually falls as earnings forecasts are revised up" | Earnings | Whether the earnings increase is just a temporary cycle peak |
| "Low-P/B stocks strong on Value-up expectations" | Multiple | Whether ROE improvement and shareholder return plans have actually come out |
| "Treasury yields surge, high-P/E stocks weak" | Multiple | Duration from Lesson 17: the more a company's earnings are concentrated in the distant future, the more sensitive it is |
The same goes for sectors. Sectors with large assets and stable earnings, like the banks in Lesson 18, are often discussed in P/B, and growth sectors in P/E. If you also look at the Macro Map's environment score, you can get a sense of which sectors' multiples the current rate phase favors.
This is not always so. P/E and P/B are only 'the price the market has put on right now' and do not tell you 'the price that will rise ahead'. Low multiples can last a long time, and high multiples can be justified by earnings growth. Please use them not as a basis for buy or sell decisions on a particular stock, but as a tool for reading whether earnings or the multiple is moving.
Quick checkThe index rose 10%, but the forward P/E fell from 22x to 20x. Roughly how much did forward EPS change?
✓What we learned today
- P/E = Price ÷ EPS is price relative to earnings, and P/B = Price ÷ BPS is price relative to assets (net assets). Both measure 'how many times you are paying'.
- P/B = P/E × ROE. The market puts a much higher price relative to assets on companies that make money well with their capital (companies with a high ROE).
- When interest rates (the required return) rise, the fair P/E falls for the same earnings and growth. Conversely, if earnings grow fast, the P/E can fall even as the stock price rises.
- A low P/E or P/B can mean 'cheap', but it can also be the market's judgment that 'earnings are about to fall' or 'ROE is low'. You need to look at the reason behind the number.
- The Korean stock market stayed around a P/B of 1x for a long time and was called the 'Korea discount', and since 2024 attempts to raise this number through the Corporate Value-up Program have continued.
Among the forces that move multiples, one that often appears alongside interest rates is 'the amount of money released into the market'. In the next lesson, Lesson 38, we follow how liquidity, quantitative easing and tightening lift and sink asset prices.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. What are the P/E and P/B of a company with a stock price of KRW 50,000, EPS of KRW 2,500 and BPS of KRW 40,000?
P/E = 50,000 ÷ 2,500 = 20x, and P/B = 50,000 ÷ 40,000 = 1.25x. The two numbers are price relative to earnings and to net assets, respectively.
Q2. Given P/B = P/E × ROE, which of two companies with the same P/E has the higher P/B?
With the same P/E, P/B is proportional to ROE. A company that makes money better with its capital gets a higher price relative to net assets.
Q3. With everything else equal, what generally happens to the fair P/E when government bond yields rise sharply?
When the required return rises, the denominator of P/E ≈ 1 ÷ (required return − growth rate) gets bigger and the fair P/E falls. The S&P 500 forward P/E falling from 21.3x to 16.7x in 2022 is an example.
Q4. A cyclical materials company has earnings at the cycle peak and its P/E looks very low at 4x. What is the interpretation to be most careful about?
A low P/E at a cycle peak can be the market's judgment that earnings are about to fall. Such a case is called a value trap.
Q5. From the end of October 2025 to August 2026, the S&P 500 rose about 12% while the forward P/E fell from 23.1x to 20.0x. What is the best explanation?
P/E = Price ÷ EPS. If the price rose but the P/E fell, it means EPS grew faster. Working backwards, forward EPS grew about 29%.
NextTerms · Next lesson · Related tools
Share price ÷ EPS. A multiple showing how many times one year's earnings the market pays for a share. It varies greatly with interest rates and investor sentiment.
P/BPrice-to-Book RatioShare price ÷ book value per share (BPS). It shows how many times the company's book net assets the stock trades at.
EPSEarnings Per ShareNet income ÷ number of shares outstanding. The profit one share earned in a year.
Forward P/EForward P/EThe current share price divided by expected EPS for the next 12 months. It is the multiple the market puts on future profit.
ValuationValuationThe work of assessing a company's value, or the degree to which a stock price is expensive or cheap relative to earnings and assets. P/E and P/B are the main indicators.
Required returnRequired returnThe minimum return an investor expects when putting money into an asset. For stocks it is roughly the Treasury yield plus a risk premium, and is used as the discount rate that converts future earnings to present value.
Market capitalizationMarket capitalizationStock price × number of shares issued. The price the market puts on the whole company.
BPS (Book value Per Share)Book value Per ShareThe company's net assets (assets − liabilities) divided by the number of shares outstanding. Dividing the share price by BPS gives PBR.
ROE (Return on Equity)Return on EquityNet income divided by net assets (equity), showing how much shareholders' money earns in a year. The relationship PBR = PER × ROE links the two multiples.
Earnings yieldEarnings yieldEPS divided by the share price, i.e. 1 ÷ P/E. A P/E of 20x means an earnings yield of 5%, used for comparison with Treasury and deposit rates.
Value trapValue trapA case where P/E and P/B look cheap, but earnings are going to fall or profitability is low, so the low multiple is justified. It often appears at the earnings peak of cyclical industries.
Korea discountKorea discountThe phenomenon of Korean listed companies receiving lower P/E and P/B than overseas companies with similar earnings and assets. Low shareholder returns, governance and geopolitical risk are cited as reasons.
Corporate Value-up ProgramCorporate Value-up ProgramA government plan announced in February 2024 to support improving corporate value. It encourages listed companies to disclose plans to improve P/B and ROE, and publishes comparisons of P/B, P/E and ROE by market.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.