Price-to-Book Ratio (P/B Ratio)

The Price-to-Book (P/B) ratio is a financial metric used to compare a company’s market value to its book value. It is calculated by dividing the company’s market capitalization (stock price multiplied by the number of outstanding shares) by its book value (assets minus liabilities). The P/B ratio is often used to assess whether a stock is undervalued or overvalued. A P/B ratio below 1 indicates that a company’s market price is less than its book value, potentially making it an attractive investment.

Example

A company with a market capitalization of $100 million and a book value of $50 million has a P/B ratio of 2, indicating that its stock price is twice its book value.

Key points

• Compares a company’s market value to its book value.

• Calculated as market capitalization divided by book value.

• A P/B ratio below 1 may indicate an undervalued stock, while a higher ratio suggests overvaluation.

Quick Answers to Curious Questions

Why is the P/B ratio important for value investors?

It helps identify undervalued stocks by comparing market value to the company’s actual book value, potentially highlighting investment opportunities.

What are the limitations of the P/B ratio?

It may not fully account for intangible assets like intellectual property, which can undervalue tech companies or those with significant intellectual assets.

How does the P/B ratio differ across industries?

Different industries have varying average P/B ratios, with capital-intensive industries often having lower ratios than tech companies with higher growth prospects.