Price-to-Book (P/B) Ratio
Investors use several metrics to determine whether purchasing stocks of a company will suffice their investment objectives or not. One such metric is the Price-to-Book value ratio (P/B Ratio).
ЁЯУШ What Is the Price-to-Book (P/B) Ratio?
The P/B ratio represents the relationship between the market value (capitalization) of an organization and the book value of its equity (assets - liabilities).
It is commonly used by value investors to identify undervalued or overvalued stocks.
ЁЯУР Formula for Price-to-Book Ratio
P/B Ratio = Market Price per Share ÷ Book Value per Share
Alternatively:
- Market Capitalization ÷ Book Value of Assets
- Where Book Value of Assets = Total Assets – Total Liabilities
ЁЯУК Example Calculation
Suppose Company JOE has:
- Market Price per Share: ₹95
- Outstanding Shares: 1000
- Total Assets: ₹5,20,000
- Total Liabilities: ₹4,10,000
Book Value = ₹5,20,000 - ₹4,10,000 = ₹1,10,000
Book Value per Share = ₹1,10,000 ÷ 1000 = ₹110
P/B Ratio = ₹95 ÷ ₹110 = 0.86
ЁЯФН Interpretation
A P/B ratio below 1 often indicates that a stock is undervalued. However, this can also signal financial distress if asset values are overstated.
✅ What Is a "Good" P/B Ratio?
A P/B ratio of 1 to 3 is typical. A ratio below 1 may indicate undervaluation but should be confirmed with other metrics such as Return on Equity (ROE).
⚠️ Limitations
Tech companies with high intangible assets may show lower book values, making P/B less reliable. Compare only within similar industries.
ЁЯУМ P/B Ratio vs ROE
ROE measures profitability relative to equity. Combined with P/B, it provides a clearer view of valuation and growth prospects.
❓ FAQs
How to Calculate Price-to-Book Ratio?
Use: P/B = Market Price per Share ÷ Book Value per Share.
What Is a Good P/B Ratio?
Generally, a P/B below 1 suggests undervaluation, while 1-3 is considered normal.
Why Is the P/B Ratio Important?
It helps identify undervalued stocks and supports value investing decisions.
ЁЯФв Try the Interactive P/B Ratio Calculator
P/B Ratio Calculator
Auto-calculates Book Value per Share from Assets, Liabilities & Shares!
ЁЯУС Auto Book Value:
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