Imagine you are drafting a research note on a leading Indian software services firm. Your quantitative model relies heavily on the Price-to-Book (P/B) ratio, yet you notice the company trades at an eye-watering 15x multiple, while a nearby manufacturing firm with superior tangible assets trades at 2x. If you rely solely on balance sheet equity, you might erroneously label the tech firm as grossly overvalued.
This is the central friction point for analysts: accounting standards typically mandate that internally generated intangible assets, such as brand equity, proprietary algorithms, or human capital, remain off the balance sheet.
In the Indian context, companies operating in the digital economy—SaaS providers, fintech platforms, or consumer brands—often possess value that is entirely disconnected from their physical ledger. When an analyst ignores these intangibles, the P/B ratio fails to provide a meaningful floor for valuation. Instead of reflecting the firm’s true worth, the ratio becomes a reflection of the firm’s accounting policy regarding R&D expenses.
Because R&D is expensed immediately rather than capitalized, the company’s book value is systematically understated, artificially inflating the P/B ratio and rendering it a poor metric for comparative analysis.
To bridge this gap, professional analysts must adjust their valuation toolkit. Instead of relying on reported book value, they often look for proxies that capture the market’s recognition of these hidden assets. This may involve shifting the valuation focus to Price-to-Earnings (P/E) or Price-to-Sales (P/S) for high-growth firms, or more specialized sector-specific metrics.
Alternatively, an analyst might perform a ’normalized’ asset valuation by attempting to estimate the replacement cost of the software or the customer acquisition value, though such adjustments require careful disclosure to avoid the subjectivity inherent in ’earnings quality’ assessments.
Ultimately, your recommendation hinges on understanding that assets are not limited to machinery or real estate. A robust research report must explicitly state why the market is assigning a premium to the firm’s equity. If the premium is driven by intellectual property that provides a sustainable competitive moat, the high P/B ratio may be justified. If the premium appears unanchored to any demonstrable, proprietary asset, the analyst must question whether the market is merely pricing a speculative bubble rather than an efficient, asset-light business model. 1 2
Nuance
Check Your Understanding
A pharmaceutical company in India spends significantly on R&D to develop a new patented drug, which it expenses in the current year’s profit and loss account as per standard accounting practices. How does this policy affect the company’s P/B ratio as a valuation metric?
When evaluating an asset-light e-commerce platform, why would an analyst prefer to supplement the P/B ratio with other metrics?
This is a companion read for Section 10.8 — Assets based Valuation Matrices from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.
Copyright © 2026 Akhilesh Gururani. All rights reserved.
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Internally generated intangibles like brand value or internally developed software are generally not recorded on the balance sheet under IND AS. ↩︎
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Normalized asset valuation refers to adjusting the accounting book value to include items that reflect true economic potential, even if they aren’t traditionally recognized as ‘assets’. ↩︎