How it works
The two measures answer different questions. P/B describes what the market pays for recorded equity; ROE describes the accounting profit generated relative to that equity. A company earning little on its equity can trade below book without being an obvious bargain. Expected future profitability and required compensation for risk also influence price.
Use matching common equity, share counts and currency. For ROE, average beginning and ending equity is a simple convention, but major capital changes may require a finer average. A year-end book value is a snapshot; annual profit is a flow. Mixing them carelessly obscures the economics.
Worked example
Assume 200 million of unchanged common equity, 10 million shares and a price of 30. Book value per share is 20 and P/B is 1.5. Annual common profit of 30 million gives ROE of 15%. A second firm with the same equity and price but profit of 10 million has ROE of 5%, despite the same P/B.
Interpretation and limits
Buybacks, leverage, impairments and intangible assets complicate interpretation. A smaller equity denominator can raise ROE without better operations. Negative equity makes common ratio comparisons problematic. Accounting and asset structures differ across sectors, so a bank and a software company are rarely comparable through P/B alone.
Chart practice
Read dated balance sheets separately and mark when the information became public. Then inspect available closed weekly or monthly bars for the price response. Student Wyckoff Pro analyzes charts; it does not verify book equity or provide a fundamental fair-value calculation.
Primary sources
Sources explain the mechanics and limitations; the editorial examples use invented numbers rather than market quotations.
Your next practical step
Continue with analysis of available closed daily, weekly and monthly bars.
Open the first-chart instructions ↗