First divide the company’s profit and recorded value among its shares
Take a fictional company with one million ordinary shares, the general ownership shares used here, each priced at ₩12,000. It has ₩1 billion left after the year’s expenses and taxes: its net income. All that profit belongs to the ordinary shareholders in this example. The assets recorded in its accounts, less the bills and other amounts it owes, leave ₩10 billion for those owners at both the beginning and end of the year. This remaining amount is shareholders’ equity, also called book equity. It is an accounting amount, not a separate bank balance.
The profit and equity must refer to the same owners. Here there are no preferred shares with special rights, no company-held shares to adjust for, and no changes in the share count. There are also no non-controlling interests: shares of subsidiary businesses owned by people outside this company’s owners. Ordinary and common shares mean the same share type here.
P/E, short for price-to-earnings, compares the share price with one share’s portion of the company’s profit. P/B, price-to-book, compares it with one share’s portion of book equity. ROE, return on equity, compares the company’s profit with the equity used to earn it; the share price does not enter that calculation. Korean company pages often use PER and PBR for the first two names. Use net income for the profit here: the revenue, operating profit and net income example explains why sales and intermediate profit figures cannot simply replace it.
Dividing ₩1 billion of profit among one million shares gives earnings per share, or EPS, of ₩1,000. Dividing the ending ₩10 billion equity by the same count gives book value per share, or BPS, of ₩10,000. Neither is a cash payment to the shareholder. Average equity is (₩10 billion + ₩10 billion) ÷ 2 = ₩10 billion; ROE uses that average here. The currency sets the units, while the ratios work the same way in dollars or euros.
On a narrow screen, scroll the tables sideways.
| Ratio | Calculation | Result |
|---|---|---|
| P/E (PER) | Price ÷ EPS: 12,000 ÷ 1,000 | 12× |
| P/B (PBR) | Price ÷ BPS: 12,000 ÷ 10,000 | 1.2× |
| ROE | Annual common net income ÷ average common equity | 10% |
A P/E of 12 means the price is 12 times the annual EPS used in that calculation. It does not promise that you will get your money back in 12 years. Earnings can change, and accounting profit is not automatically paid to you as cash.
Has the stock become cheaper, or has the business weakened?
Now hold the one million shares and the ₩10 billion beginning and ending equity fixed, and change only the price or profit. Each row starts again from the original company. These are independent hypothetical cases, not successive years in its history. Holding equity fixed lets us see which ratio changes because the share price changes and which changes because the business earns less.
| Case | Share price | Annual EPS | P/E | P/B | ROE |
|---|---|---|---|---|---|
| Base case | ₩12,000 | ₩1,000 | 12× | 1.2× | 10% |
| Half the price, same earnings | ₩6,000 | ₩1,000 | 6× | 0.6× | 10% |
| Half the price and earnings | ₩6,000 | ₩500 | 12× | 0.6× | 5% |
| Loss instead of profit | ₩6,000 | −₩500 | — (not meaningful) | 0.6× | −5% |
When only the price halves, P/E falls from 12 to 6. When both price and earnings halve, P/E returns to 12. A lower share price alone does not establish that you are paying less for each unit of earnings. A P/E using past earnings can also look low after an unusually profitable period, just before profits fall.
The loss case needs a different reading. Dividing ₩6,000 by −₩500 mechanically gives −12, but treating that as a bargain would reverse the meaning of the ratio. We mark P/E as not meaningful for losses; with zero EPS the division is undefined. A data service may show a dash or a negative figure, so check its convention.
Holding equity fixed is a teaching assumption. In real accounts, profit kept by the company adds to equity, losses reduce it, and payments to owners or transactions involving shares can change it too. The statement of changes in equity is the report that traces the opening amount to the closing amount. Our negative ROE is an illustrative calculation; a data service may choose not to display negative ratios.
A P/B below one is not a cash redemption offer
At 0.6 times book, the share price is below the recorded assets-minus-liabilities amount per share. Liabilities are the bills and other amounts the company owes. This gap compares a market price with an accounting record. It is not an offer to pay shareholders the book amount in cash, and does not show what would remain if the business sold everything and settled its bills.
Equipment may sell for less than the amount in the accounts, and closing a business can bring further costs. In the other direction, a brand, workforce or technology developed inside the company may help it earn money without appearing in the accounts at a similar value. Buying another business also affects what is recorded, so similar businesses can show different book amounts because of their acquisition accounting.
Compare businesses with similar assets, accounting and risks. A bank and a software company can have very different reasons for trading above or below book. If common equity is zero, the usual P/B calculation is undefined; if it is negative, a normal “low P/B means cheap” interpretation no longer works.
A smaller equity amount can raise ROE
The company earns ₩1 billion against average equity of ₩10 billion, so its ROE is 10%. This tells us about profit inside the company. To know what a shareholder earned, we would also need the price paid, the later share value and any cash received. None of those enters ROE, so 10% ROE is neither a 10% investment return nor a promised payment or future growth rate.
The same profit divided by a smaller equity amount gives a larger percentage. For example, a company can borrow money and use it to buy back shares from its owners. The buyback can reduce equity and lift ROE even if selling its products has become no more profitable. Meanwhile, the loan creates repayment risk and interest charges that may reduce profit.
One unusually profitable asset sale can temporarily lift the profit used in the ratio too. Check both the source of the earnings and the size of the equity base.
Look across several reporting periods at profit, borrowing and cash flow—the money actually coming in and going out. A very small equity amount can make ROE look striking even if the profit cannot continue. With zero average equity the division cannot be done. With negative average equity the arithmetic may produce a number, but the usual comparison with positive-equity businesses becomes misleading.
Why P/B does not always equal P/E × ROE
In the base case, 12 × 0.10 = 1.2. P/E times ROE gives P/B because the earnings, equity and share counts line up. Use ROE as a decimal here, not the number 10. This relationship is useful for understanding the ratios, but matching the labels on a data screen is not enough.
Suppose beginning equity is instead ₩8 billion and ending equity ₩12 billion. Average equity is still ₩10 billion. With the same ₩1 billion profit, one million shares and ₩12,000 price, ROE is 10% and P/E is 12×. Ending BPS is now ₩12,000, so P/B is 1.0×, while 12 × 0.10 remains 1.2.
ROE uses average equity here; P/B uses ending equity. That is why the two sides differ. Check the share counts and profit periods as well before using the shortcut with figures from a company page.
Before comparing two companies, check the small print
Start with the date of the share price and the period covered by profit. A trailing P/E uses past reported profit. A forward P/E uses profit someone expects in the future. The latter can change before the company has earned anything more. Two websites can therefore show different figures when they use different prices, profit periods or update dates.
A group of companies may include a parent and businesses it controls, called subsidiaries. Some subsidiary shares can belong to outside owners. Total group profit then includes money attributable to those owners, while a common-equity figure may refer only to the parent’s ordinary shareholders. Match the owners before dividing. Also check share counts. Basic EPS commonly averages the shares across the period, allowing for how long each count applied. BPS uses a count on the reporting date. Diluted EPS may include shares that could be created later, so its count can differ again.
Then look at any profit adjustments. An estimate for next year, last year's reported income and an adjusted profit figure are different inputs even if each is labelled earnings. Find the explanation before using one company's multiple as a benchmark for another.
The company’s accounts are its reports of recorded income, assets and obligations. Trace the profit and equity figures there, then read the accompanying notes and management’s explanation of unusual changes. Those explanations help distinguish money earned by repeat business from a one-off sale. The tables here use the stated teaching formulas rather than any data provider’s particular calculation rules.
An ETF is a fund holding a collection of investments that can be bought and sold in shares. Its P/E combines information from many businesses. Excluding a loss-making company or using a different holdings date can change that combined figure. Read the provider’s rules for bringing those businesses together before interpreting it as if it came from one company.
Dividend figures need the same care with denominators. Our dividend yield and payout ratio guide compares a cash dividend with the share price and with common earnings, then separates a price decline from a fall in profit.
About the examples
The companies, prices and financial figures are invented. The base and scenario examples assume one million common shares throughout, no preferred claims, treasury shares or non-controlling interests, and annual income attributable to common shareholders. ROE uses average beginning and ending common equity; the separately labelled timing example changes those balances.
The scenarios are independent, not successive financial statements. Prices are in Korean won, and taxes, trading costs and dividends are excluded. These examples explain the calculations rather than value a security. See our editorial policy.