What the price-to-book ratio tells you
The ratio compares a market price with an accounting value. The share price is set by trading on the stock market. Book value per share comes from the balance sheet: it is the equity that belongs to common shareholders, divided by the number of common shares outstanding at the balance sheet date.
Preferred equity is left out because preferred shareholders rank ahead of common shareholders for dividends and for repayment if the company is liquidated. If a company has preferred shares, subtract their value from total equity before you divide. You can reach the same result at company level by dividing market capitalization by common shareholders’ equity, as long as both use the same share count.
A P/B of 2.50 means the market values each share at two and a half times the equity recorded for it on the balance sheet. A P/B below 1.00 means the share price is lower than book value per share.
Reading a high or low result
- A high P/B can reflect expectations that the company will earn high returns on its equity, or that it owns valuable assets the balance sheet does not fully record.
- A low P/B, including one below 1.00, can reflect doubts about whether the assets are worth their recorded amounts, expected losses, or low returns on equity. It does not, on its own, mean the shares are undervalued.
P/B is linked to profitability. If two companies have the same P/E, the one that earns more on its book equity will have the higher P/B. As with any multiple, compare companies in similar businesses that report on the same basis, and look at the same company over time.
What the ratio does not show
- Book value is largely a record of the past. Many assets are carried at what they cost less depreciation, not at what they are worth today.
- Assets a company has built itself, such as brands and customer relationships, are often not recorded at all, so P/B says less about businesses whose value rests on them.
- When book value per share is negative, P/B is not meaningful and the calculator shows a message instead of a result. Negative equity can follow years of losses, or large share buybacks and dividends.
Common mistakes
- Using total equity when the company has preferred shares, which overstates book value per share.
- Including equity that belongs to non-controlling interests in a group. Use the equity attributable to the parent company’s common shareholders.
- Counting treasury shares, which the company has bought back and still holds, as outstanding.
- Comparing P/B between businesses whose assets are very different in kind, such as one that owns factories and one whose value lies mainly in software and brands.
Related measures
Return on equity measures the profit a company earns on the same book equity, which helps explain why P/B differs between companies. The price-to-earnings ratio compares the share price with earnings instead of equity. The debt-to-equity ratio also uses book equity, setting it against what the company owes. Other market-based measures are listed under valuation ratios.