What Is the Price-to-Book (P/B) Ratio?

Definition The Price-to-Book Ratio (P/B Ratio) compares a company's market price to its book value. It reflects how much investors are willing to pay for each rupee of a company’s net assets. Formula P/B Ratio = Market Price per Share ÷ Book Value per Share What Is Book Value? Book Value is calculated as Assets minus Liabilities. This is what the company would be worth if it were liquidated today. Why P/B Ratio Matters • A P/B ratio less than 1 may suggest that the stock is undervalued. • A P/B ratio greater than 1 indicates that the stock is trading at a premium to its book value. It is particularly useful for evaluating banks and companies with significant tangible assets. Value investors often use this ratio to find bargains in the market. Example If a company’s stock price is ₹200 and its book value per share is ₹100, then the P/B ratio is: P/B = 200 ÷ 100 = 2 This means investors are paying ₹2 for every ₹1 of the company’s net assets. Limitations • It does not account for intangible assets such as brand reputation, intellectual property, or goodwill. • Not ideal for companies in the technology or service sectors where physical assets are minimal. • Can be distorted for companies with outdated or depreciated assets on their books. Best Used With • P/E Ratio to get a broader picture of valuation. • Return on Equity (ROE) to understand how efficiently a company is using its book value to generate profit.