The price-to-book (P/B) ratio is an evaluation metric that is used to compare the current market price of a company’s stock to its book value. The P/B ratio is favored by value investors for its usefulness in identifying undervalued companies.
The average P/B ratio for banking firms, as of January 2018, is approximately 1.24.
P/B is sometimes calculated as an absolute value, dividing a company's total market capitalization by the book value from the company's current balance sheet. The calculation is sometimes done on a per-share basis.
Comparing P/B Ratios
Due to variables that uniquely apply to different types of businesses, average P/B values vary substantially between industries. The average P/B ratio for the banking industry is significantly lower than the overall market average P/B of 3.02.
Although an analysis of P/B values should always be filtered through same-industry comparisons, higher P/B ratios are usually an indication that investors anticipate that the company will generate additional profits from its existing level of assets. The perception of investors may also be that the current market value of the company is significantly higher than the company’s financial statements reflect.
Do Banks Low P/B Ratios Indicate Good Value?
The banking industry's average P/B value being down near one makes it worthy of consideration by value investors who seek out companies with P/B values below two, with a particular focus on companies showing values of one or lower.
For value investors, a low P/B ratio is the classic indication of an undervalued stock. Growth investors are likely to consider investing in promising regional banks. Smaller regional banks are more likely than the big four of Wells Fargo, Bank of America, Citigroup and JPMorgan Chase to experience significant growth over a relatively short period of time.