P/E ratio and book value, for Nepali stocks.

The short answer

P/E is what you pay for one rupee of earnings. Book value per share is what the company is worth on paper, per share. Both are comparisons, not verdicts. They only mean something next to a peer group or the company’s own history.

P/E, plainly

Price divided by earnings per share.

A share at Rs 500 that earned Rs 25 per share has a P/E of 20. You are paying twenty times one year of current earnings.

A low P/E can mean the share is cheap. It can equally mean the market expects those earnings to fall. A high P/E can mean it is expensive, or that the market expects growth. The ratio poses the question; it does not answer it.

P/E only works inside a sector

This is the part most often skipped.

A commercial bank earns steadily and predictably. A hydropower company may earn little while a project is being built and a great deal once it runs. A microfinance institution behaves differently again.

Comparing their P/E ratios against each other tells you almost nothing. Comparing one commercial bank against another commercial bank tells you something real.

Filter by sector first — which is what the screener is for — then compare within it.

Book value per share

Everything the company owns, minus everything it owes, divided by the number of shares.

Roughly: what one share represents on paper if the company stopped today and settled up.

It is an accounting figure. It reflects what the books say the assets are worth, which is not always what they would fetch. For a bank, a large part of “assets” is its loan book — and a loan is only worth its stated value if it gets repaid.

Face value is not book value

Nepali shares are issued at a face value of Rs 100. That number never changes. It is the nominal figure used for issuance, dividends and rights.

Book value moves every year with profits and losses. A company with a Rs 100 face value might have a book value of Rs 250 after years of retained earnings, or below Rs 100 after losses.

They are entirely different ideas that happen to be quoted in the same currency.

Trading below book value

When the market price is under book value, the market is saying the company is worth less than its accounts claim.

Sometimes that is an oversight. Often it is a judgement — particularly for lenders, where it usually means the market doubts the loan book is worth its stated value.

So it is a starting point for investigation. Go and look at NPL and capital adequacy before deciding the market is wrong.

The bonus share trap

Nepali companies distribute bonus shares often, and both of these ratios are per share.

Issue bonus shares and the share count rises. The same earnings and the same net worth are divided among more shares, so EPS falls and book value per share falls — with nothing whatsoever having happened to the business.

Before concluding a company is deteriorating, check whether it simply issued bonus shares. See bonus shares vs rights shares.

Common mistake to avoid

Screening on a single ratio. “P/E under 15” will return companies that are cheap for excellent reasons alongside companies that are cheap for terrible ones. A ratio narrows a list of 250 down to a list worth reading. It does not produce a decision.

Pro tip

Look at the trend rather than the snapshot. One year’s P/E tells you where the price sits today. Five years of earnings tells you whether those earnings are reliable enough for the ratio to mean anything at all.

Every symbol on NEPSE has its own page here with price history and dividend record, and compare puts two candidates next to each other.