Glossary
Price-to-book ratio (P/B)
Market price divided by book value per share, comparing what investors pay with the accounting net worth of a company.
The price-to-book ratio (P/B) compares a company's market value with its book value, the net worth shown on its balance sheet. A P/B of 1 means the market values the company at exactly what its accounts say shareholders own; a P/B of 5 means investors pay five dollars for each dollar of recorded equity. It is most useful for asset-heavy businesses such as banks and insurers, where book value tracks economic value fairly closely.
How it works
Many analysts strip out preferred equity and some also subtract Goodwill and other intangibles to get tangible book value, which gives a stricter P/TBV ratio.
How to read it
P/B and profitability are linked. A company that earns a high Return on equity (ROE) grows its book value quickly, so investors pay a premium to book; one that earns less than its cost of capital often trades below book. A bank earning 15% on equity might trade near 2× book, while one earning 6% might trade below 1×.
Limits to keep in mind
- Intangible-heavy companies. Software, pharmaceutical and consumer brands create value through R&D and marketing that accounting expenses rather than records as assets, so their book values are small and P/Bs look huge.
- Buybacks. Large share repurchases shrink equity and can push book value close to zero or negative, making P/B meaningless.
- Stale values. Assets are mostly carried at historical cost less depreciation, which may differ widely from what they would fetch today.