Table of Contents

price-to-book_p_b_ratio

Price-to-Book Ratio (also known as the P/B Ratio or Price-to-Equity Ratio) is a financial metric used by investors to compare a company's current market price to its Book Value. Think of it as a reality check: you're comparing the price the market is willing to pay for the company today with the company's net worth as stated on its books. The ratio is calculated by dividing the current stock price per share by the book value per share. For disciples of Value Investing, the P/B ratio is a classic tool. A low P/B ratio can suggest that a stock is undervalued and potentially a bargain, as if you're buying the company's assets for less than their accounting value. Conversely, a high P/B ratio might indicate that a stock is overvalued. However, it's not that simple. The P/B ratio is a starting point for investigation, not a final answer, as it tells you what the price is relative to the book value, but not why.

How to Calculate the P/B Ratio

The formula is straightforward and has two key ingredients: the company's stock price and its book value per share. P/B Ratio = Market Price per Share / Book Value per Share

Capipedia’s Bottom Line

The Price-to-Book ratio is a foundational tool in the value investor's kit, but it is not a magic wand. Think of it as a powerful first question in a long conversation. A low P/B prompts you to ask, “Is this a hidden gem or a falling knife?” A high P/B makes you question, “Is this company's future growth really worth this premium?” For a complete picture, always use the P/B ratio in conjunction with other metrics like the P/E ratio, Dividend Yield, and Return on Equity (ROE). Your goal is to build a mosaic of evidence to understand the true value and prospects of a business.