What Is Price-to-Book Ratio?
The price-to-book ratio compares a stock's market price to its book value per share. Learn how P/B works and what it tells you about a stock's valuation.
Definition
The price-to-book (P/B) ratio compares a company's stock price to its book value per share. Book value is the net asset value of a company: total assets minus total liabilities, divided by shares outstanding. If a stock trades at $50 and its book value is $25, the P/B ratio is 2.0x, meaning the market values the company at twice its accounting value.
A P/B below 1.0 means the stock is trading below book value -- the market is valuing the company at less than its net assets. This could signal a bargain or indicate that the market believes the assets are impaired, earnings are declining, or the business faces serious problems. Benjamin Graham, the father of value investing, famously sought stocks trading below book value.
P/B ratios vary dramatically by industry. Banks and insurers typically trade at 1-2x book value because their assets are primarily financial instruments. Technology companies might trade at 10-30x book because their value comes from intellectual property, brands, and future growth -- none of which fully appear on the balance sheet.
Real-World Example
A bank has total assets of $200 billion, total liabilities of $180 billion, and 2 billion shares outstanding. Book value per share = ($200B - $180B) / 2B = $10. If the stock trades at $12, the P/B ratio is 1.2x. For a bank, this is reasonable. During the 2008 financial crisis, many bank stocks traded at 0.3-0.5x book value because investors feared massive loan losses would destroy the assets on the books.
Why It Matters
P/B is most useful for valuing asset-heavy companies like banks, insurers, real estate firms, and manufacturers. It provides a floor valuation -- what would the company be worth if it liquidated all its assets and paid all its debts? For tech companies and service businesses where value comes from intangibles, P/B is less meaningful. Use it alongside P/E, cash flow metrics, and industry comparisons for a complete picture.
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Frequently Asked Questions
What is a good P/B ratio?
It depends on the industry. For banks, 1.0-1.5x is typical. For industrials, 2-4x is common. Tech companies often trade at 10x+ book value. A P/B below 1.0 may be a bargain or a warning sign -- you need to investigate why.
Can the P/B ratio be negative?
Book value can be negative if liabilities exceed assets (meaning negative shareholder equity). In this case, the P/B ratio is meaningless. Companies with negative book value are heavily indebted and may be in financial distress.
What is the difference between P/E and P/B?
P/E compares price to earnings (profit flow). P/B compares price to book value (net asset value). P/E tells you how much you pay for a dollar of profit. P/B tells you how much you pay for a dollar of net assets.
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