Price to book: what the ratio compares, and when it is useful

The price-to-book ratio (P/B) compares what the market is willing to pay for a company with the equity shown in its accounts. When it is low, it is often presented as a sign of a "bargain". That is too quick a reading: P/B means nothing without the sector, the profitability and the quality of the assets. This article explains how it is calculated, how to read it and its limits.

Price to book: definition and formula

Price to book relates a company's market value to its book value:

P/B = market capitalisation ÷ shareholders' equity

or, per share: share price ÷ book value per share, where book value per share is equity divided by the number of shares.

Shareholders' equity, group share (the "book value"), is what remains for shareholders if all debts are subtracted from the assets on the balance sheet. To find that line, see how to read a balance sheet and an income statement.

How to read a P/B below or above 1

P/B below 1: the market values the company at less than its accounting equity. This can reflect doubt about the real value of the assets, low expected profitability, or a temporary discount. On its own, it is not a sign of a bargain.
P/B close to 1: the market values the company at roughly its book value.
P/B above 1: the market expects more value creation than the accounts show: undervalued assets on the balance sheet, high profitability, growth prospects.

Fictitious example. A company reports €1,000M of equity and is valued at €800M on the stock market: its P/B is 0.8. Another, with identical equity, is valued at €3,000M: its P/B is 3. The second figure is not "better" or "worse": it reflects different expectations, which must be linked to each company's profitability.

P/B and ROE: a pair to read together

A high P/B is easier to justify when the company earns a lot on its equity. ROE measures exactly that. A company that durably delivers a high ROE can legitimately be valued above its book value, whereas a low ROE makes a high P/B harder to explain. To understand this measure, see ROE, return on equity.

Similarly, P/B can be compared with the P/E ratio: the two ratios look at valuation from two angles, earnings for one, the balance sheet for the other. For the P/E ratio, see the P/E ratio and how to read it.

In which sectors is P/B relevant?

P/B is mostly meaningful for companies whose value rests on financial or physical assets shown on the balance sheet: banks, insurers, real estate companies, heavy industry. For a bank, book value is a classic valuation reference.

It is much less so for companies whose value comes from intangible assets: software, brands, patents, data. These assets are poorly recorded or not recorded on the balance sheet, so their P/B is structurally high without necessarily signalling overvaluation. For sectors and their classification, see the 11 stock market sectors.

Comparing P/B ratios is mostly relevant within the same sector, with comparable accounting standards.

The limits of price to book

Book value is not the market value of the assets. Land bought 30 years ago, obsolete inventory or goodwill can be poorly valued on the balance sheet.
Share buybacks and losses distort the ratio. Large buybacks reduce equity and mechanically push P/B up. Repeated losses reduce it too.
Negative equity makes the ratio unusable.
It includes intangible assets. For banks in particular, tangible book value is also examined, that is, excluding goodwill.
It ignores debt. Two companies with the same P/B can have very different financial structures.

Key takeaways

P/B compares market value with accounting equity.
A P/B below 1 is not, in itself, a bargain; a high P/B is not, in itself, overvaluation.
It is read together with profitability (ROE), within the same sector.
It is most useful for companies with large assets on the balance sheet, and little for companies with intangible assets.

To read a stock's valuation ratios alongside its other indicators, open its page in Earnnest.

This article is for information and education only and does not constitute personalised investment advice. The figures in the examples are fictitious and illustrative.