Price-to-Book Ratio (P/B)

The Price-to-Book ratio (P/B) compares a company's market price to its book value per share. It is calculated by dividing the current stock price by book value per share, which is total equity divided by shares outstanding.

A P/B ratio below 1.0 means the stock trades below its book value, suggesting investors value the company at less than the net assets on its balance sheet. This may indicate undervaluation or reflect market concerns about asset quality or future profitability.

When P/B Is Useful

P/B is most useful for asset-heavy industries where book value is a meaningful measure of worth: banks, insurance companies, manufacturers, and real estate firms. For these businesses, book value represents tangible assets that could be sold.

P/B is less useful for technology and service companies whose value lies in intangible assets like software, patents, and brand. These companies often have P/B ratios of 10x or more because their true value far exceeds the assets recorded on their balance sheets.

Benjamin Graham used P/B as one criterion in his investment philosophy, preferring stocks trading below 1.5 times book value. This remains part of the Graham Number formula used to screen for undervalued stocks.