Price-to-Book Ratio (P/B Ratio)

What it is

The price-to-book (P/B) ratio compares a company’s market value to its book value. It shows how much investors are willing to pay for each dollar of the firm’s net assets recorded on the balance sheet.

Key formulae

• P/B ratio = Market price per share / Book value per share
• Book value per share = Shareholders’ equity / Shares outstanding
• Price-to-tangible-book (PTBV) adjusts for intangibles:
• Tangible book value per share = (Shareholders’ equity − Intangible assets) / Shares outstanding

Where to find inputs

• Market price per share: stock market quotes
• Shareholders’ equity and intangible asset amounts: company balance sheet (financial statements)
• Shares outstanding: company filings or market data providers

How to calculate (example)

Company has $100M in assets, $75M in liabilities (no intangibles), and 10M shares outstanding.
* Book value = $100M − $75M = $25M
* Book value per share = $25M / 10M = $2.50
* If share price = $5.00, P/B = 5.00 / 2.50 = 2.0
Interpretation: the market values the company at twice its book value.

What the P/B ratio tells you

• P/B > 1: market value exceeds book value; investors may be pricing future growth, intangible value, or superior profitability.
• P/B < 1: market value is lower than accounting net assets; could indicate an undervalued stock or financial/structural problems.
• P/B is most useful when comparing companies within the same industry because asset intensity and accounting treatments vary by sector.

Common uses

• Value screening: value investors often look for low P/Bs as candidates for deeper analysis.
• Complementary metric: used with ratios like return on equity (ROE) and price-to-earnings (P/E) to assess valuation quality.
• Works when earnings are negative: P/B remains meaningful for firms with negative earnings (when P/E is unusable).

Price-to-book vs. price-to-tangible-book

• P/B uses total shareholders’ equity (including goodwill and other intangibles).
• PTBV excludes intangible assets to focus on hard, tangible assets. Useful when intangible values are uncertain (e.g., acquired goodwill, patents).

Limitations and pitfalls

• Industry differences: capital-light sectors (software, services) typically have high P/Bs; capital-intensive sectors (manufacturing, finance) usually have lower P/Bs.
• Accounting variations: different accounting standards or recent write-offs, acquisitions, or buybacks can distort book value.
• Intangible value: a low book value may understate true economic value if the company has valuable unrecognized intangibles (brand, proprietary tech, R&D).
• Negative book value: if shareholders’ equity is negative, P/B is not useful.
• Not forward-looking: book value is historical accounting data; P/B itself does not directly measure future cash flows.

Practical guidance

• Compare P/B among peers in the same industry and adjust for business models.
• Use P/B alongside ROE, P/E, growth forecasts, and qualitative factors to form a valuation view.
• Consider PTBV when intangibles are material or uncertain.

Explain Like I’m 5

P/B shows whether a stock costs more or less than what the company owns after paying debts. If the price is much lower than that value, it might be cheap—or it might mean the company is in trouble. If the price is higher, investors expect the company to do well or have valuable things not shown on the balance sheet.

Key takeaways

• P/B = market price per share / book value per share.
• Useful for identifying potentially undervalued stocks, especially in asset-heavy industries.
• Interpret relative to industry peers and other valuation and performance metrics.
• Be cautious when intangibles, accounting changes, or negative book values are present.

Bottom line

The P/B ratio is a straightforward, balance-sheet–based valuation metric that helps indicate how the market values a company’s net assets. It is most powerful when combined with other financial ratios and sector-aware analysis rather than used in isolation.