HOMEPAGE

Price‑to‑Book (P/B) Ratio

Definition

The Price‑to‑Book (P/B) ratio compares a company’s market value to its book value. It shows how much investors are willing to pay for each dollar of net assets on the balance sheet.

$$\text{P/B Ratio}=\frac{\text{Share Price}}{\text{Book Value Per Share}}$$

Book value per share is calculated as:

$$\text{Book Value Per Share}=\frac{\text{Shareholders’ Equity}}{\text{Shares Outstanding}}$$

Why It Matters

• Helps investors assess whether a stock is undervalued or overvalued relative to its net assets.
• Useful for analyzing asset‑heavy industries such as banks, insurers, and manufacturers.
• A low P/B may indicate undervaluation or financial distress.
• A high P/B may reflect strong profitability, brand value, or growth expectations not captured on the balance sheet.

How to Interpret It

• P/B < 1.0: The stock trades below its book value — may signal undervaluation or asset quality concerns.
• P/B > 1.0: Investors value the company above its net assets — often due to strong earnings power or intangible value.
• Industry Context: Asset‑light businesses (software, services) naturally have higher P/B ratios.

Example

A company has:

• Share Price: $40
• Shareholders’ Equity: $800 million
• Shares Outstanding: 20 million

$$\text{Book Value Per Share}=\frac{800\text{million}}{20\text{million}}=40$$

$$\text{P/B Ratio}=\frac{40}{40}=1.0$$

A P/B of 1.0 means the stock trades exactly at its book value.