Price-to-Book Ratio (P/B)

The price-to-book ratio (P/B) is a company's share price divided by its book value per share, where book value is the shareholders' equity recorded on the balance sheet. Put another way, it is market capitalization divided by the accounting net worth of the company. It tells an investor how much the market is paying for each unit of net assets that the accounts say the company owns.

The ratio is a standard tool in value investing and in the analysis of banks and insurers, whose balance sheets consist mostly of financial assets carried at or near current values. It is usually read alongside the price-to-earnings ratio and return on equity. Many analysts prefer a stricter version, price to tangible book, which removes goodwill and other intangible assets from the denominator.

Suppose you are buying a hardware shop. The accounts list its shelves, stock, van and cash, minus what it owes suppliers, at a total of 200,000. If you pay 200,000 you are paying exactly what the books say it is worth; if you pay 300,000 you are paying extra for something the books do not capture, such as a loyal customer base or a good location.

P/B measures that gap. A ratio above one says buyers think the business is worth more than its recorded net assets. A ratio below one says they think the assets are overstated, or that the business will struggle to earn a decent return on them.

The standard calculation is:

where book value per share is:

• Price per share is the current market price of one ordinary share.
• Total shareholders' equity is total assets minus total liabilities, from the most recent balance sheet.
• Preferred equity is removed because it belongs to holders of preferred stock, not to common shareholders.

Worked example: a company reports equity of $4.2 billion, of which $0.2 billion is preferred stock, and has 200 million ordinary shares. Book value per share is $(4.2 - 0.2) \div 0.2 = 20$, or $20. At a share price of $25 the P/B is $25 \div 20 = 1.25$. If $1 billion of the equity is goodwill and other intangibles, tangible book value per share is $3.0 \div 0.2 = 15$, or $15, and price to tangible book is about 1.67.

For banks the P/B ratio is a primary valuation measure. Loans and securities make up most of a bank's assets, and bank capital is closely linked to accounting equity, so book value is a reasonable estimate of what shareholders own. Tangible book is preferred because supervisors deduct goodwill and most intangibles when calculating regulatory capital, and lenders apply a similar idea when they test a borrower's tangible net worth.

A bank trading well below book often signals that investors doubt the stated value of its loans or securities, as happened when unrealized losses on securities portfolios hit several US banks in 2023. P/B is also linked to profitability: a company that earns a return on equity above its cost of equity should trade above book, and one that earns less should trade below it. Under simple steady-growth assumptions:

where ROE is return on equity, $g$ is the long-run growth rate and $r$ is the cost of equity. With ROE of 12%, growth of 3% and a cost of equity of 10%, the justified P/B is $(0.12 - 0.03) \div (0.10 - 0.03) \approx 1.29$.

Benjamin Graham, in The Intelligent Investor, suggested that a defensive investor should avoid paying more than 1.5 times book value and proposed that the P/E multiplied by the P/B should not exceed 22.5. In academic finance, Eugene Fama and Kenneth French showed in the early 1990s that US stocks with a high book-to-market ratio (the inverse of P/B) had historically earned higher average returns, which made book-to-market the standard definition of a value stock in index construction; a growth stock typically sits at the other end of the scale.

• Book value records many assets at historical cost less depreciation, so property bought decades ago or a fully depreciated brand may be worth far more than the books show.
• Companies built on software, patents, data or people often carry little book value, so their P/B can be very high without implying they are overpriced.
• Large share buybacks shrink equity and can push book value close to zero or below, making P/B meaningless for some well-known companies.
• Accounting rules differ: IFRS and US GAAP treat some assets, such as revalued property, differently, and assets measured under mark-to-market rules move with prices while others do not.

For these reasons P/B works best for asset-heavy and financial companies and within a sector, and it is one input to a wider valuation rather than a measure of intrinsic value on its own. It should also be checked against audited financial statements rather than headline data feeds, since different providers treat preferred stock and intangibles differently.

• Investor.gov (SEC): Stocks FAQs