What it means
Book value is total assets minus total liabilities, the figure the accountants say the shareholders own. Dividing market capitalisation by book value, or share price by book value per share, tells you the premium or discount that the market attaches to that accounting number.
The ratio earns its keep with asset heavy businesses: banks, insurers, property companies, shipping lines and manufacturers whose balance sheets genuinely reflect what drives profit. For a consultancy or a software firm, whose value sits in people and code that never appear as assets, the ratio can be close to meaningless.
A ratio below 1 means the market values the company at less than its stated net assets, which is either a bargain or a warning that those assets are worth less than the books claim. A great deal of value investing consists of telling those two situations apart.
Book value is recorded at historical cost less depreciation, so a factory bought decades ago may sit on the balance sheet at a small fraction of what it would fetch today. That understates book value and inflates the ratio, which is why comparisons work best within an industry rather than across the whole market.
Share buybacks complicate things, because repurchasing shares above book value reduces book equity faster than it reduces the share count. A company can push its price to book ratio higher without anything real changing in the underlying business.
In practice
Real-world examples.
Example
A regional bank trades at a price to book ratio of 0.7 after a credit scare. Investors are effectively saying the loan book is worth 30% less than the bank's own valuation, which is a judgement about future loan losses rather than about today's balance sheet.
Example
An engineering group with old but productive factories carries a price to book ratio of 3.1. Its property was bought in the 1980s and sits at depreciated historical cost, so the ratio overstates how expensive the shares really are.
Example
A fund manager screening for value candidates filters for price to book below 1.0 across a shipping index. Half the results turn out to have vessels that need replacing within five years, which explains the discount and removes them from the shortlist.
Think of it
“P/B compares price to accounting value-market versus book value.
Formula
Calculation
Price to book ratio = market capitalisation / book value of equity, which is the same as share price / book value per share
A property holding company reports total assets of $900,000,000 and total liabilities of $600,000,000, so its book value of equity is $900,000,000 - $600,000,000 = $300,000,000. It has 50,000,000 shares in issue, giving a book value per share of $300,000,000 / 50,000,000 = $6.00.
The shares trade at $15.00, so market capitalisation is 50,000,000 x $15.00 = $750,000,000. The price to book ratio is $750,000,000 / $300,000,000 = 2.5, and the per share route gives the same answer: $15.00 / $6.00 = 2.5.Case study
Seen in the real world.
The following is an illustrative and fictional case. Wexford Tool Works, an invented maker of industrial cutting equipment, listed with net assets of $300,000,000 and a market value of $750,000,000, giving a price to book ratio of 2.5.
Over three years the fictional company bought back $150,000,000 of its own shares at prices well above book value. Book equity fell to $170,000,000 while the market value held around $700,000,000, pushing the reported price to book ratio above 4.1 even though profits and factories were unchanged.
A new analyst covering the stock flagged that the ratio had moved for purely mechanical reasons and switched to comparing enterprise value against operating profit instead. The illustrative lesson is that price to book is a useful starting point but a poor conclusion, particularly when a company has been actively reshaping its own balance sheet.
Watch out
Common mistakes.
- Applying the ratio to technology or services companies, whose main assets are people, brands and software that never reach the balance sheet.
- Assuming a ratio below 1 automatically signals a bargain, when it often signals that the market expects asset write downs.
- Comparing price to book across sectors instead of within one, which produces conclusions driven by accounting conventions rather than by value.
Questions
People also ask.
What is a normal price to book ratio?
Banks and property companies often trade near 1, while asset light businesses routinely trade above 5, so normal only means anything within a sector.
Does the ratio include intangible assets such as goodwill?
Yes, standard book value includes goodwill and other intangibles, which is why some analysts prefer the price to tangible book ratio instead.
Can book value per share be negative?
Yes, when liabilities exceed assets, and in that case the ratio stops being meaningful and should not be quoted.
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