Valuation Ratios: P/E, P/B, EPS, PEG, and P/S

This is Part 2 of the Fundamental Analysis series. If you have not read Part 1 yet, start with Liquidity Ratios to build a strong foundation before diving into valuation.

Earnings Per Share (EPS) — The Foundation

EPS is a metric that indicates how much profit a company makes for each share outstanding. It is the foundational building block for understanding valuation ratios.

There are two common ways to express the EPS formula:

EPS = Profit After Tax / Total Number of Outstanding Shares

EPS = (Net Income - Dividends) / Average Outstanding Shares

The EPS equation involves three key terms:

• Net Income / Profit After Tax — The total profit a company earns after all expenses and taxes are paid.
• Dividends — Payments made to shareholders from the company's profits.
• Average Outstanding Shares — The total number of shares currently held by all shareholders.

Suppose a company has a Profit After Tax of $100 and 1,000 total shares. Then:

EPS = 100 / 1,000 = 0.10

This means the company earns $0.10 per share.

EPS can increase in two ways:

• Higher profits — The company earns more profits; straightforward.
• Fewer outstanding shares — The company reduces the number of shares through buybacks or similar actions.

Price-to-Earnings (P/E) Ratio

The P/E ratio is the ratio of a company's stock price to its earnings per share (EPS).

P/E = Stock Price / Earnings Per Share (EPS)

If a stock price is $1,000 and EPS is $100, then:

P/E = 1,000 / 100 = 10

The P/E–EPS Relationship

The P/E ratio does not exist in isolation — it depends entirely on EPS. EPS changes every quarter when a company publishes its financial results, while the stock price can change daily based on market sentiment and trading activity. This creates an important dynamic:

• If EPS falls and the stock price stays the same, the P/E ratio rises — the stock is now at a higher valuation because profitability has declined but the price has not adjusted.
• If EPS rises and the stock price stays the same, the P/E ratio falls — the stock is now at a lower valuation because the same price now buys higher profitability, making it relatively cheaper.

Rule of thumb: P/E is inversely proportional to EPS. A lower P/E can indicate that you are getting the stock at a lower valuation relative to its earnings.

Book Value and Price-to-Book (P/B) Ratio

There are two distinct ways to value a share:

• Book Value per Share — The accounting value, derived from the company's balance sheet.
• Market Value per Share — The current trading price of the stock in the market.

Book value represents the net asset value of a company:

Book Value = Total Assets - Total Liabilities

The nature of assets and liabilities varies significantly across different types of companies:

Company Type	Assets	Liabilities
Service-Based	Cash reserves, human resources, outstanding orders, software licenses, computers, and servers.	Office rent or lease, employee payroll, bonuses, long-term debt.
Product-Based	Intellectual property, proprietary algorithms, cash reserves.	Similar to service-based companies, plus component supplier costs.
Manufacturing (e.g., Cement)	Heavy machinery, finished goods, large inventories.	Long-term debt, recurring asset maintenance costs.

Book Value per Share = Book Value / Total Number of Shares

Suppose a company has Total Assets of $10 billion, Total Liabilities of $2 billion, and 100 million total shares. Then:

Book Value = $10B - $2B = $8 billion

Book Value per Share = $8B / 100M = $80

The P/B ratio compares market price to book value:

P/B = Market Price per Share / Book Value per Share

• P/B = 1 (e.g., $80 / $80) — Fairly valued. The market price matches the company's book value.
• P/B > 1 (e.g., $90 / $80 = 1.12) — Overvalued. The market values the company above its book value.
• P/B < 1 (e.g., $50 / $80 = 0.62) — Undervalued. The market values the company below its book value.

Keep in mind that intangible assets (such as brand value) may or may not be included in book value calculations, and book value is updated once per quarter, while market value changes continuously with the stock price.

Price/Earnings-to-Growth (PEG) Ratio

The PEG ratio refines the P/E ratio by factoring in the company's expected earnings growth rate.

PEG = P/E Ratio / Expected Growth Rate

The expected growth rate is the projected rate at which the company's EPS is expected to grow in the near future. For example, if a company's EPS grew by 20% in the past year and is expected to grow by 25% next year, that 25% is used as the growth rate.

Assume a company has a current P/E Ratio of 20 and an Expected Growth Rate of 25%. Then:

PEG = 20 / 25 = 0.8

How to interpret the PEG ratio:

• PEG < 1 — Undervalued. The company's growth justifies a higher valuation than its current P/E suggests.
• PEG = 1 — Fairly valued. Growth and valuation are in balance.
• PEG > 1 — Overvalued. The stock may be expensive relative to its growth potential.

A Practical Example

Consider a company with a P/E of 50. By looking at P/E alone, the stock appears expensive. However, if the company's expected future earnings growth rate is 50%, then:

PEG = 50 / 50 = 1

The PEG ratio of 1 indicates that, despite the high P/E, the stock is actually fairly valued because the exceptional growth justifies the premium.

The PEG ratio does not make sense when there is no growth or when EPS is negative. Predicting future growth is inherently difficult — past growth does not guarantee future performance. That said, the PEG ratio is a very useful financial indicator when a company appears undervalued based on its P/E and has strong potential for future earnings growth. In such cases, it provides a more complete picture than the P/E ratio alone.

Price-to-Sales (P/S) Ratio

The Price-to-Sales ratio (also known as the Market Cap-to-Sales ratio, P/S ratio, or Sales Multiple) compares a company's stock price to its revenue. It helps determine whether a stock is overvalued or undervalued.

P/S = Market Capitalization / Total Revenue (Sales)

Key characteristics of the P/S ratio:

• Lower is cheaper — A lower P/S ratio generally indicates a cheaper stock relative to its sales.
• Sector comparison required — It cannot be evaluated in isolation; compare it against other companies in the same sector.
• Debt not included — Sales figures do not account for the company's existing debt.

Suppose a company has a Market Cap of $1 million and Annual Sales of $0.5 million. Then:

P/S = 1M / 0.5M = 2

This means you are paying $2 for every $1 of sales the company generates.

The P/S ratio is particularly important for companies where profit-based metrics like P/E are not applicable. Early-stage companies and startups (e.g., Uber, DoorDash in their early years) often have low or negative profit margins. During the initial growth phase, profit may be negligible or nonexistent, but sales may be strong. In such cases, the P/E ratio cannot be used to evaluate the company, making the P/S ratio a critical alternative.

Real Example: TCS vs. Accenture

Let's apply every valuation ratio we covered to two real IT services companies — TCS and Accenture — using their latest financial reports.

Financial Data Used

Metric	TCS	TCS (in USD)	Accenture
Stock Price (Jul 14, 2026)	Rs 2,200.60	$22.90	$134.32
Shares Outstanding	362 Cr	3.62B	612M
Market Cap	Rs 796,617 Cr	$82.9B	$82.2B
TTM Net Profit	Rs 49,826 Cr	$5.18B	$7.7B
TTM Revenue	Rs 275,859 Cr	$28.7B	$73.4B
Shareholders' Equity	Rs 107,240 Cr	$11.2B	$31.9B

Earnings Per Share (EPS)

EPS = Net Profit / Total Shares

Company	Net Profit (TTM)	Shares	EPS (TTM)
TCS	Rs 49,826 Cr	362 Cr	Rs 137.64
Accenture	$7.7B	612M	$12.53

TCS TTM EPS is derived from four trailing quarters: FY26 full-year EPS (Rs 136.01) minus Q1 FY26 EPS (Rs 35.27) plus Q1 FY27 EPS (Rs 36.90). Accenture TTM EPS is calculated as 9-month FY26 diluted EPS ($10.27) plus estimated Q4 FY25 EPS ($2.26).

Price-to-Earnings (P/E) Ratio

P/E = Stock Price / EPS

Company	Stock Price	EPS (TTM)	P/E Ratio
TCS	Rs 2,200.60	Rs 137.64	16.0x
Accenture	$134.32	$12.53	10.7x

Accenture trades at a significantly lower P/E than TCS. This is partly because Accenture's stock price has fallen over 50% from its highs, compressing its valuation despite stable earnings growth.

Price-to-Book (P/B) Ratio

P/B = Stock Price / Book Value per Share

Company	Shareholders' Equity	Shares	Book Value/Share	P/B Ratio
TCS	Rs 107,240 Cr	362 Cr	Rs 296.24	7.43x
Accenture	$31.9B	612M	$52.11	2.58x

TCS has a much higher P/B ratio, meaning the market values TCS at over 7 times its book value. This is common for asset-light IT services companies with strong return on equity.

PEG Ratio

PEG = P/E / EPS Growth Rate (%)

Company	P/E	EPS Growth (YoY)	PEG Ratio
TCS	16.0x	4.6%	3.46
Accenture	10.7x	8.9%	1.21

TCS EPS growth is calculated from Q1 FY27 (Rs 36.90) vs. Q1 FY26 (Rs 35.27). Accenture EPS growth is calculated from Q3 FY26 ($3.80) vs. Q3 FY25 ($3.49).

A PEG above 1 suggests the stock may be expensive relative to its earnings growth. TCS has a higher PEG because its P/E is higher but its recent EPS growth has been modest. Accenture's PEG near 1 indicates its valuation is more aligned with its growth rate.

Price-to-Sales (P/S) Ratio

P/S = Market Cap / TTM Revenue

Company	Market Cap	TTM Revenue	P/S Ratio
TCS	Rs 796,617 Cr	Rs 275,859 Cr	2.89x
Accenture	$82.2B	$73.4B	1.12x

TCS commands a higher revenue multiple than Accenture, reflecting the market's premium for TCS's higher profit margins (22.7% operating margin vs. Accenture's 17.0%).

Valuation Ratios — TCS vs. Accenture

Key Observations

• TCS trades at a premium across all ratios — higher P/E, P/B, PEG, and P/S compared to Accenture.
• Accenture appears cheaper on paper — its P/E of 10.7x and PEG of 1.21 suggest a more favorable valuation relative to earnings and growth.
• Context matters — TCS has higher profit margins and a stronger return on equity, which partly justifies its premium. Accenture's stock has seen a sharp correction, which has compressed its multiples.
• No single ratio is conclusive — as we discussed throughout this post, always evaluate multiple ratios together and compare within the same sector.

All numbers are taken from the TCS Q1 FY27 Results and Annual Report 2025-26 and the Accenture Q3 FY26 Earnings Release. Stock prices are as of July 14, 2026. TCS figures are in Indian Rupees (Rs); 1 Cr (crore) = 10 million. The USD equivalent in the financial data table uses an exchange rate of $1 = Rs 96.10.

Summary

Valuation ratios are essential tools in fundamental analysis that help investors determine whether a stock is overvalued, fairly valued, or undervalued.

Ratio	Formula	Key Use	Valuation Signal
EPS	Profit After Tax / Total Shares	Measures profitability per share.	Higher EPS = stronger profitability.
P/E	Stock Price / EPS	Compares price to earnings.	Lower P/E may indicate undervaluation (if fundamentals are strong).
P/B	Market Price / Book Value per Share	Compares market value to net asset value.	< 1 = Undervalued, = 1 = Fair, > 1 = Overvalued.
PEG	P/E / Expected Growth Rate	Adjusts P/E for growth expectations.	< 1 = Undervalued, = 1 = Fair, > 1 = Overvalued.
P/S	Market Cap / Total Revenue	Values a company based on sales.	Lower ratio = cheaper relative to sales; useful when profits are absent.

• EPS is the foundation — it drives the P/E ratio and influences PEG. Understanding EPS is the first step to understanding valuation.
• No single ratio tells the full story — P/E gives a snapshot based on earnings, P/B provides an asset-based perspective, PEG adds a growth dimension, and P/S offers a fallback when earnings are not available.
• Always compare within the same sector — ratios like P/S and P/E are most meaningful when benchmarked against peers in the same industry.
• Be mindful of limitations — book value may exclude intangibles like brand value, future growth is hard to predict, and sales figures do not account for debt.
• Valuation ratios are a starting point — they should be used alongside other fundamental analysis tools (such as liquidity ratios, profitability ratios, and qualitative assessments) for a well-rounded investment decision.

This analysis is for educational purposes only and does not constitute investment advice.