How to Find good bank to invest

On the basis of P/B ratio we can find good bank to invest 

Why is P/B Ratio More Relevant for Banks Than P/E Ratio?

There are many financial ratios that can help you determine the financial health of a bank, like GNPA, NNPA, PCR, CAR, CASA, NIM, P/E, and P/B ratios. Each of these ratios provides certain insights into the bank’s financial strength.

Today, we are going to focus on two commonly used financial ratios – P/E and P/B and look at the reasons that make P/B ratios more relevant to banks than P/E ratios.

What are The P/E Ratio and P/B Ratio?

The market price of the share of a company is an indicator of the way investors perceive it. If the investors feel that a company holds a lot of promise and can grow and earn good profits in the future, then they would want to buy its shares leading to an increase in its price. 

On the other hand, if a company is perceived to be in troubled waters, then investors tend to stay away and sell its stocks. While the market price of a share does not directly indicate the strength of the company, it is an indicator of the market’s perception.

1. P/E Ratio

When you plan to buy a stock, you need to assess the company’s fundamentals and investor perception to make an informed decision. This is where the P/E Ratio helps.

A P/E or Price to Earnings Ratio is the ratio of the market price of a company’s stock to its earnings per share (EPS). In other words,

P/E Ratio = Market Price Earning Per Share

It indicates how much money an investor has to invest in the company to earn Re.1 of the company’s earnings. So, if the P/E Ratio of a company is 25, then you need to invest Rs.25 in the said company to earn one rupee of its earnings.

2. P/B Ratio

While the P/E Ratio is based on the company’s earnings, the P/B ratio takes its book value instead. 

Book Value of a company is the net value of all its assets after deducting all liabilities. In other words,

Book Value = Total Assets-Total Liabilities

A P/B or P/BV or Price to Book Value Ratio is the ratio of the market price of a company’s stock to its book value per share (BVPS). In other words,

P/B Ratio = Market PriceBook Value Per Share (BVPS)

BVPS is the accounting value of each share of a company and is calculated as follows:

BVPS = (Total Shareholder Equity-Preferred Equity)Total Outstanding Common Shares

It indicates the amount of money an investor has to invest in the net assets of the company. Since the market value of a share is usually higher than its book value, the P/B is typically greater than 1. A high P/B Ratio is an indicator that investors expect the management of the company to generate more value from the given assets.

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