Loading the player...

What is the 'Price-To-Book Ratio - P/B Ratio'

The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

Also known as the "price-equity ratio".

Calculated as:

P/B Ratio = Market Price per Share / Book Value per Share

where Book Value per Share =  (Total Assets - Total Liabilities) / Number of shares outstanding

A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.

This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

For more, check out Digging Into Book Value

BREAKING DOWN 'Price-To-Book Ratio - P/B Ratio'


The P/B ratio reflects the value that market participants attach to a company's equity relative to its book value of equity. A stock's market value is a forward-looking metric that reflects a company's future cash flows. The book value of equity is an accounting measure that is based on the historic cost principle, and reflects past issuances of equity, augmented by any profits or losses, and reduced by dividends and share buybacks.

The Differences Between the Market and Book Value of Equity

Due to accounting conventions on treatment of certain costs, the market value of equity is typically higher than the book value of a company, producing a P/B ratio above 1. Under certain circumstances of financial distress, bankruptcy or expected plunges in earnings power, a company's P/B ratio can dive below 1. Because accounting principles do not recognize brand value and other intangible assets, unless they are derived through acquisitions, all costs associated with creating intangible assets are expensed immediately. For example, research and development (R&D) costs must be expensed, reducing a company's book value. However, these R&D outlays can create unique production processes for a company, or result in patents that can bring royalty revenues going forward. While accounting principles favor a conservative approach in capitalizing costs, market participants may raise the stock price as a result of such R&D efforts, resulting in wide differences between the market and book values of equity.

Advantages and Disadvantages to the P/B Ratio

Investors find the P/B ratio useful because the book value of equity provides a relatively stable and intuitive metric that can be easily compared to the market price. Also, the P/B ratio can be used for firms with positive book values and negative earnings since negative earnings render price-to-earnings ratios useless, and there are fewer companies with negative book values than companies with negative earnings. However, when accounting standards applied by firms vary, P/B ratios may not be comparable, especially for companies from different countries. Also, P/B ratios can be less useful for services and information technology companies with little tangible assets on their balance sheets. Finally, the book value can become negative as a result of a long series of negative earnings, making the P/B ratio useless for relative valuation purposes.

  1. Book-to-Market Ratio

    The book-to-market ratio is a ratio used to find the value of ...
  2. Price to Tangible Book Value - ...

    Price to tangible book value is a valuation ratio expressing ...
  3. Combined Ratio

    Combined ratio is a measure of profitability used by insurance ...
  4. Adjusted Book Value

    The adjusted book value is a measure of a company's valuation ...
  5. Public Book (Of Orders)

    A book containing all of the buy and sell orders for a specific ...
  6. Return on Market Value of Equity ...

    Return on market value of equity (ROME) is a comparative measure ...
Related Articles
  1. Investing

    Market Value Versus Book Value

    Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
  2. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  3. Investing

    5 Must-Have Metrics for Value Investors

    These quick-and-dirty ratios will help you find the most undervalued stocks on the market.
  4. Investing

    Book Value Per Share for Banks: Is It a Good Measure? (WFC, BAC)

    Find out why bank stocks usually trade below book value per share, and understand how trading activities increase banks' risk exposures and affect valuation.
  5. Investing

    Analyzing GE's Price & Profitability Ratios in 2016 (GE)

    Learn about General Electric and its financial metrics that help investors analyze the company's relative valuation and profitability.
  6. Investing

    SXC Health Solutions Corp. (USA) Among the Nasdaq's Biggest Movers

    The market is having a bad day so far: the Nasdaq is trading down 0.3%; the S&P 500 has declined 0.4%; and the Dow has slipped 0.5%. The Nasdaq Composite Index is a capitalization-weighted index, ...
  7. Investing

    Analyzing AT&T's Price & Profitability Ratios in 2016 (T)

    Conduct fundamental analysis on AT&T by examining its price and profitability ratios.
  8. Investing

    Five Low Price-To-Book Value Stocks

    Stocks with low price-to-book values tend to be safer, on average, than the overall market. Here's a look at five that may have potential to become enviable investments.
  9. Investing

    Deep Discount-To-Book Value Stocks

    With the right company, buying at a discount-to-book value could prove fruitful.
  1. What is considered a good price to book ratio?

    Discover what is considered to be a good price-to-book ratio value, and learn the factors to consider when interpreting this ... Read Answer >>
  2. What is the average price-to-book ratio in the oil & gas drilling sector?

    Calculating the price to book ratio for oil and gas drilling companies can provide insight for investors interested in understanding ... Read Answer >>
  3. What is the average price-to-book ratio of companies in the Internet sector?

    Understand what the price-to-book (P/B) ratio is used to measure. Learn the average P/B ratio of companies in the Internet ... Read Answer >>
  4. What is the average price-to-book ratio for a bank?

    Learn what the average price to book (P/B) ratio is in the banking industry and how the P/B evaluation is used when analyzing ... Read Answer >>
  5. If a company has a low price to book ratio, does this mean its stock is undervalued?

    Learn the usefulness of the price-to-book ratio, a primary equity valuation measure, and determine how it can best be used ... Read Answer >>
  6. Does a high price to book ratio correspond to a high ROE?

    Learn the correlation between the two equity valuations, price to book ratio and return on equity, and why it can be advantageous ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center