Price-to-Book Ratio: What P/B Tells You About a Stock

The price-to-book (P/B) ratio compares what the stock market values a company at with the value of its net assets on the balance sheet. It's a classic tool of value investors.

The formula

P/B = share price ÷ book value per share

Book value is shareholders' equity: total assets minus total liabilities. Divide it by the number of shares to get book value per share. Equivalently, P/B = market cap ÷ shareholders' equity.

Example: a company with $10 billion of equity and a $15 billion market cap has a P/B of 1.5. Investors are paying $1.50 for each dollar of net assets on the books.

What P/B tells you

• Below 1: the stock trades for less than its accounting net worth. It can signal a bargain, or that investors doubt the assets are worth what the books say or expect losses ahead.
• Around 1 to 3: common for banks, insurers, industrial and asset-heavy companies.
• Well above 3: common for companies whose value comes from brands, software, patents or skilled people rather than physical assets.

Where P/B works best

P/B is most useful for businesses whose assets are mainly financial or tangible and are valued close to market prices, especially banks and insurance companies. It's often paired with return on equity: a bank earning a high ROE usually deserves a higher P/B than one earning a low ROE.

Blind spots

• Intangible assets are understated. Brands and internally developed software or research usually don't appear on the balance sheet at their real value, so P/B makes many excellent companies look expensive.
• Buybacks shrink book value, sometimes to negative, making P/B meaningless.
• Book values can be stale: assets recorded at historical cost may be worth much more or less today.
• Write-downs can suddenly reduce book value.

Use it with other measures

Combine P/B with the P/E ratio, EV/EBITDA and free cash flow yield for a fuller picture. You'll find balance sheet data on every StockEngine stock page, and can line up valuation ratios in the compare tool.

This article is educational and not investment advice.