What is Price-to-Book Ratio (P/B)?
Definition
The Price-to-Book ratio (P/B) compares a company's market capitalization to its book value. It shows how much investors are paying for each dollar of net assets and is particularly useful for valuing financial companies, asset-heavy businesses, and distressed companies.
Detailed Explanation
The P/B ratio is calculated by dividing the current stock price by the book value per share. Book value is total assets minus total liabilities. Tangible book value further excludes intangible assets like goodwill.
A P/B below 1.0 suggests the stock is trading below its book value, which could indicate an undervalued opportunity or that the market believes assets are impaired. A P/B above 1.0 means the market assigns a premium.
The P/B ratio is most useful for banks and financial institutions. For capital-light technology companies, P/B ratios can be very high (10-30+) and are generally less useful.
Benjamin Graham, the father of value investing, used P/B ratio extensively as a screening criterion, typically seeking stocks trading below 1.5x book value.
Formula
P/B Ratio = Stock Price / Book Value Per Share
or
P/B Ratio = Market Capitalization / Total Book ValueExample
A bank has total assets of $500 billion, total liabilities of $450 billion, so book value is $50 billion. With a market cap of $60 billion, its P/B ratio is 1.2x.
Frequently Asked Questions
When is the P/B ratio most useful?
What does a P/B ratio below 1.0 mean?
How does goodwill affect the P/B ratio?
Related Terms
Price-to-Earnings Ratio (P/E)
The Price-to-Earnings Ratio (P/E) compares a company's current stock price to its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings, making it one of the most common valuation metrics in stock analysis.
Market Capitalization
Market capitalization (market cap) is the total market value of a company's outstanding shares of stock. Calculated by multiplying the share price by the total number of shares, it represents the market's consensus valuation of a company's equity.
Return on Equity (ROE)
Return on Equity (ROE) measures how effectively a company uses shareholder equity to generate profits. Expressed as a percentage, it divides net income by shareholders' equity and is a key indicator of management efficiency and business quality.
Book Value
Book value is the net asset value of a company, calculated as total assets minus total liabilities from the balance sheet. It represents the theoretical amount shareholders would receive if the company liquidated all assets and paid off all debts.
See It in Action
Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
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