Price-to-Book Ratio (P/B Ratio)
What Is the Price-to-Book Ratio (P/B Ratio)?
The price-to-book ratio (P/B ratio) compares a company’s market price per share to its book value per share. Book value represents the company’s net assets after liabilities are subtracted from total assets.
The ratio helps investors assess whether a stock may be undervalued or overvalued relative to its net assets.
Why It Matters
The P/B ratio is often used to evaluate companies with significant tangible assets, such as banks or manufacturing firms.
A low P/B ratio may suggest that the stock is undervalued, while a high ratio may indicate strong growth expectations.
How the P/B Ratio Works
The P/B ratio is calculated as:
Market Price per Share ÷ Book Value per Share
Book value reflects the company’s assets minus liabilities, divided by shares outstanding.
Investors compare P/B ratios across companies within the same industry.
Example
If a company’s book value per share is $20 and its stock trades at $40, the P/B ratio is 2. This means investors are paying twice the company’s book value.
P/B Ratio vs Price-to-Earnings Ratio
- P/B ratio compares market value to asset value.
- P/E ratio compares market price to earnings.
FAQs About the P/B Ratio
What does a P/B ratio below 1 mean?
It may suggest the stock is trading below its book value.
Is a high P/B ratio always bad?
Not necessarily. Growth companies may have higher ratios.
Do investors use P/B ratios in value investing?
Yes. It is a common valuation metric.
Related Terms
