Market prices often move far from a company’s true worth, creating a gap between perception and actual value. The price to book value ratio connects a company’s market valuation with the actual strength of its balance sheet. It offers a grounded view of how much investors pay for each unit of net assets. In this blog, we’ll look at its formula, meaning, and more in-depth details to understand how price to book value brings perspective to valuation.
What is Price to Book Value?
The price to book ratio also known as the P/B ratio connects a company’s stock market value to its financial health on its balance sheet. The market price is what the stock sells for on an exchange. The book value of a company is its net asset value, found by deducting total liabilities from total assets reported. This ratio helps show what the market believes the company is worth compared to its accounting value.
Formula for Price to Book Value
The price to book value formula is used to find the P/B ratio. It can be calculated in two main ways, but the most common one uses the “per share” value.
P/B Ratio = Market Price per Share / Book Value per Share (BVPS)
To apply this formula, the first step is to calculate the Book Value per Share (BVPS). The BVPS is derived using the equation:
BVPS = (Total Assets – Total Liabilities) ÷ Total Outstanding Shares
Both total assets as well as liabilities can be located in the balance sheet records of the company. The BVPS figure indicates the net asset value of the company on a per-share basis. This is then divided into the current market price of one share to get the ratio. For example, if a stock trades at ₹500 and its BVPS is ₹200, the P/B ratio is 2.5.
How to Interpret P/B Ratio
The interpretation of P/B ratio helps understand how the market values a company’s net assets. A P/B ratio is generally viewed in comparison to the number 1 or against its industry average. Here are common ways to look at it:
- P/B ratio below 1: When this ratio dips under 1, it reflects that the market is pricing the shares beneath the company’s recorded book worth. This may imply that the stock is underpriced, or it could reflect possible weaknesses in the company’s financial health.
- P/B ratio above 1: If the ratio is above 1, it reflects that the firm’s shares are priced higher than the worth of its assets on record.
This generally suggests that investors have optimistic views about the company’s future performance. - P/B ratio of 1: A ratio of one reflects that the stock’s trading price mirrors the company’s accounting-based valuation.
It’s best to assess the ratio in comparison with similar companies in the same sector and with the company’s own past P/B data to understand its relevance.
Step-by-Step Calculation with Example
Calculating the P/B ratio involves a few clear steps. Let’a understand its working better with the help of P/B ratio examples:
Step 1: Gather the Required Information
You need four pieces of information. The first two, Total Assets and Total Liabilities, are found on the company’s balance sheet. For example, here is a simplified balance sheet for Company ABC Ltd.:
| Assets | Amount (₹) | Liabilities & Equity | Amount (₹) |
| Current Assets (Cash, etc.) | 20,00,000 | Total Liabilities | 20,00,000 |
| Fixed Assets (Property, etc.) | 30,00,000 | Shareholders’ Equity | 30,00,000 |
| Total Assets | 50,00,000 | Total Liabilities & Equity | 50,00,000 |
From this, we get:
- Total Assets: ₹50,00,000
- Total Liabilities: ₹20,00,000
You also need the following two items:
- Market Price per Share: Let’s say it is ₹150.
- Total Outstanding Shares: Let’s say it is 20,000.
Step 2: Calculate the Total Book Value (Shareholders’ Equity).
This is Total Assets minus Total Liabilities.
Total Book Value = ₹50,00,000 – ₹20,00,000 = ₹30,00,000
Step 3: Calculate the Book Value per Share (BVPS)
Divide the Total Book Value by the Total Number of Outstanding Shares.
BVPS = ₹30,00,000 / 20,000 Shares = ₹150 per share
Step 4: Calculate the Price to Book Value Ratio
Use the main formula: Market Price per Share / Book Value per Share.
P/B Ratio = ₹150 / ₹150 = 1
As we can see, Company ABC’s P/B ratio is 1. This reflects that the share is priced in the market exactly at its book value.
P/B Ratio vs Other Valuation Ratios
The P/B ratio is one of many tools used for valuation. Here’ s how the price to book value ratio differs from other ratios:
| Ratio | Formula | Focus area | What it measures |
| P/B ratio (Price-to-book) | Market price per share/Book value per share | Balance sheet strength | Compares the market price to the company’s accounting value. Particularly effective for evaluating firms with large capital assets. |
| P/E Ratio (Price-to-earnings) | Market price per share/Earnings per share (EPS) | Profitability | Compares the market price to the company’s profits. Highlights the value investors are assigning to each rupee of profit earned by the company. |
| P/S Ratio (Price-to-Sales) | Market price per share/Sales per share | Revenue efficiency | Compares the market price to the company’s total revenue. Useful for companies without current profits. |
| Dividend yield | Annual dividend per share/Market price per share | Income return | Shows the percentage return paid to shareholders as dividends. |
| P/CF ratio(Price-to-cash flow) | Market price per share/Cash flows per share per | Cash generation | Demonstrates how much value the market assigns to the company’s ongoing cash-generating operations. Often used to assess financial stability and liquidity. |
Industry Benchmarks
Industry benchmarks of price to book ratio for diverse sectors as of November 06th, 2025 are indicative of valuation levels that vary across industries, which include, as follows, key sectors with their typical ranges and important considerations:
- Banking and financial services: The average P/B ratio varies, with typical ranges from 1.8-2.5 for some segments and 3.5-3.8 for others, reflecting tangible asset valuation.
- Information technology: This high-growth sector exhibits high P/B ratios, often between 12.0 and 22.0, driven by intangible assets and strong future earnings prospects.
- Consumer goods and FMCG: These sectors possess high valuations, supported by brand value, with average ratios typically ranging from 12.5 and higher, depending on the equity base and brand intangible.
- Auto and capital goods: More asset-intensive, these industries have seen P/B expansion, with average ratios ranging widely from 3.9 to over 37.0.
- Real estate and infrastructure: Valuations are highly variable, with average ratios often trading around 3.5 to 7.0, though specialized sub-sectors can trade significantly higher.
These benchmarks help investors compare relative valuations across Indian industries, aiding investment decision-making based on market conditions and sector-specific factors.
Advantages and Limitations of P/B Ratio
The P/B ratio is a useful metric, but it is important to understand its benefits and drawbacks. These include:
Advantages
- Stability: Book value is generally more stable than earnings or sales, which can fluctuate. This makes the P/B ratio a more consistent measure over time.
- Use with unprofitable companies: Since it relies on book value instead of earnings, the ratio can be used to value companies that are not currently profitable (i.e., have negative earnings).
- Good for certain industries: It is very effective for valuing companies with large tangible assets, such as banks, insurance companies, and manufacturing firms.
- Valuation “floor”: Book value also acts as a base valuation, roughly estimating what shareholders might receive if the company liquidated all assets and cleared its debts.
Limitations
- Ignores intangible assets: One limitation is that it overlooks intangible assets like brand value, patents, or employee expertise, which do not appear on the balance sheet.
This makes it less useful for service or technology-based companies. - Accounting differences: Different companies may use different accounting rules (e.g., for depreciating assets), which can change their book value and make comparisons misleading.
- Does not show growth: A low P/B ratio alone doesn’t reveal anything about the firm’s potential expansion or future profit generation.
- Can be distorted: Actions like share buybacks or large asset write-offs can artificially change a company’s book value, which can distort the ratio.
How Investors Use P/B Ratio
Investors use the P/B ratio in several specific ways to make informed decisions. The primary uses are:
| Investor strategy | How the P/B ratio is used |
| Value investing | Investors who follow value-based strategies generally seek companies trading at lower price-to-book ratios, particularly when the ratio is under 1.0. They search for companies that the market has potentially overlooked or undervalued compared to their net assets. |
| Industry comparison | This is the most common use. Investors often benchmark a company’s P/B ratio against industry peers to determine if it’s valued fairly in the market. A P/B ratio that is much higher or lower than the average needs further investigation. |
| Screening for assets | It is used to find companies that are “asset-heavy,” like manufacturing, banking, or real estate. For these sectors, book value is a more reliable measure of the company’s core worth. |
| Historical analytics | An investor can track a single company’s P/B ratio over time (e.g., 5 or 10 years). This helps them see if the stock is currently trading at a ratio that is high or low compared to its own historical average. |
Real-World Case Studies
Here are two live case studies of P/B ratio based on recent data:
- Tata Motors
As of October 2025, Tata Motors has a P/B ratio of 1.30. In other words, the market prices the stock at 1.3 times its accounting worth. Tata Motors’ market capitalisation was ₹151,011.1 crore, while its book value stood at ₹116,050 crore as per the consolidated results of March 2025.
The ratio reflects how the market values Tata Motors relative to its net assets, and how investor perception aligns with its growth and asset efficiency over time.
- Infosys
As of October 2025, Infosys carries a higher P/B ratio of approximately 6.50. This implies investors pay around 6.5 times its book value to hold a share. Infosys’ market capitalisation was about ₹620,501.2 crore, with a book value of ₹94,750 crore as of March 2025 consolidated results.
The increased P/B ratio is common for high-growth IT services companies, reflecting strong intangible assets and earnings prospects. The ratio has varied historically from a low near 2.94 up to over 11.5 in the past thirteen years, showcasing market cycles and valuation shifts.
Conclusion & Key Takeaways
The price to book value ratio’s main function is to provide a baseline rooted in accounting. It helps identify how much the market is willing to pay above or below a company’s net asset worth. This figure is most powerful when used to compare similar firms or to track one company’s valuation over time.
FAQs
Price to book value (P/B ratio) compares a company’s market price per share to its book value per share. It shows how much investors pay for each unit of net assets, offering insight into whether a stock is overvalued or undervalued.
P/B ratio ignores intangible assets like brand value or intellectual property, can be distorted by accounting differences, does not reflect future growth potential, and may mislead if affected by share buybacks or asset write-offs, making it less reliable for all sectors.
Calculate P/B ratio by dividing market price per share by book value per share. Book value is total assets minus liabilities, divided by outstanding shares. This ratio quantifies the market valuation relative to a company’s accounting net asset value.
Yes, a P/B ratio below 1 suggests a stock may be undervalued or facing issues, while a ratio above 1 indicates the stock trades at a premium, often reflecting market optimism about growth, but requires further analysis to confirm valuation.
A good P/B ratio varies by industry but is typically near or slightly above 1 for asset-heavy sectors. Comparing with industry peers and historical levels helps identify reasonable valuation levels. Low P/B can indicate value or risk.
Investors use P/B ratio to evaluate valuation relative to net assets, compare companies within industries, screen for asset-heavy firms, and track valuation changes over time. It complements other ratios, aiding informed investment decisions.
P/B ratio compares market price to the company’s net assets (balance sheet), focusing on asset value. P/E ratio compares price to earnings (income statement), focusing on profitability, showing how much investors pay per unit of company profits.
