Price-to-Book Ratio

By
rjonesx
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The price-to-book ratio, also known as P/B ratio or price-to-equity ratio, is a type of financial ratio which is primarily used to compare the organization’s net assets that are available for common stockholders, relative to the actual sales price of the stocks.

In other words, this ratio is used to evaluate a share’s market value to the shares book value. The ratio is derived by simply dividing the stock’s recent closing price by the book value per stock of the latest quarter.

Formula

P/B= Stock Price/ [Total Assets – Intangible Assets & Liabilities]

OR

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

Price-to-Book Ratio Analysis

The calculations from this formula are then used to analyze the stock performance of the company. If the ratio is over 1, it means the market is primarily willing to offer more than the equity/ share. However, if the ratio is below 1, it shows that the market is willing to offer a price lower than the equity/share.

A low price-to-book ratio usually means that the stock or share is either undervalued or that there is something fundamentally going wrong within the organization. The company is not performing at par.

The price-to-book ratio also gives investors an idea of whether the company is paying more for what would otherwise be left if in case the company goes bankrupt.

For firms in distress, the book-value is calculated without taking into account intangible assets as they would have zero resale value.

Advantages of Price-to-Book Ratio

Speculators find this financial ratio quite useful as it provides them a relatively intuitive and stable metric which can be used to compare the prevailing market price. Besides this, the price-to-book ratio can be utilized by companies with negative earnings but positive book values.

Underlying Factors that Can Affect the P/B Ratio Calculations

Some factors that may affect P/B ratio calculations are:

  • New stock issuance
  • Dividend payouts
  • Stock repurchases

Price To Book Ratio FAQ

What is a good price to book ratio?

Value investors have favored the price-to-book (P/B) ratio for decades and market analysts use it widely. Traditionally, below 1.0 is considered good, showing a potentially undervalued stock. However, value investors often consider stocks with a P/B value under 3.0.

How do you calculate price to book ratio?

Calculate the “Price/Book Value” Ratio (P/BV) by dividing the price of a share of stock by the book value per share. For example, a company with $100 million dollars in net assets and 10 million shares outstanding has a book value of $10 a shares ($100 million in assets / 10 million shares).

What is a good book value per share?

Value investors have favored the price-to-book (P/B) ratio for decades and market analysts use it widely. Traditionally, below 1.0 is considered good, showing a potentially undervalued stock. However, value investors often consider stocks with a P/B value under 3.0.

Why do banks use price to book ratio?

PB ratio is used to value stocks in the banking space. The ratio helps in understanding the number of times the stock is trading over and above the company’s book value. It is the total value of the company’s assets shareholders would theoretically get if the company were to wind up.

What is price to book value mean?

Price-to-book value (P/B) is the ratio of the market value of a company’s shares (share price) over its book value of equity. The book value of equity, in turn, is the value of a company’s assets on the balance sheet.

Is book value per share important?

Book value is important as a means of valuation because it represents a fair and accurate picture of a company’s worth, and investors and market analysts can get a reasonable idea of the company’s actual worth. Book value is primarily important for investors using a value investing strategy.

Further Reading

  • New evidence on size and price-to-book effects in stock returns – www.tandfonline.com [PDF]
  • Financial statement analysis of leverage and how it informs about profitability and price-to-book ratios – link.springer.com [PDF]
  • The link between earnings conservatism and the price‐to‐book ratio – onlinelibrary.wiley.com [PDF]
  • Explaining bank market-to-book ratios: Evidence from 2006 to 2009 – www.sciencedirect.com [PDF]
  • The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth – www.jstor.org [PDF]
  • Price/book value ratios and equity returns on the Tokyo Stock Exchange: Empirical evidence of an anomalous regularity – onlinelibrary.wiley.com [PDF]
  • Price‐Earnings and Price‐to‐Book Anomalies: Tests of an Intrinsic Value Explanation – onlinelibrary.wiley.com [PDF]

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