Where the P/E ratio compares price with profits, the price-to-book (P/B) ratio compares price with what a company owns. It is one of the oldest valuation tools and is still widely used for certain industries.
What book value is
Book value is shareholders’ equity on the balance sheet: total assets minus total liabilities. In theory, it is what shareholders would be left with if the company sold its assets at their recorded values and paid off all its debts. Book value per share divides that figure by shares outstanding.
The formula
P/B = share price รท book value per share, or equivalently market capitalization divided by shareholders’ equity.
A P/B of 1 means the market values the company at exactly its accounting net worth. Above 1, investors believe the company is worth more than its recorded assets; below 1, they value it at less.
Where price-to-book works well
Banks and financial companies
A bank’s balance sheet consists mostly of loans and securities, which are carried at values reasonably close to what they are worth. That makes book value a meaningful anchor, and P/B is one of the standard ways to value banks. Analysts often use tangible book value, which excludes goodwill and other intangible assets, for an even stricter measure.
Insurers and asset-heavy industries
Insurance companies, some real estate companies, and certain industrial businesses also have balance sheets dominated by tangible or financial assets, making P/B useful.
P/B and return on equity
P/B is closely linked to return on equity (ROE), which is net income divided by shareholders’ equity. A company that earns a high return on its equity deserves to trade well above book value, because each dollar of equity generates strong profits. A company earning less than its cost of capital may deserve to trade below book. When looking at a low P/B, always ask why: is the market overlooking value, or is the company earning poor returns?
Where price-to-book fails
- Intangible-heavy companies: accounting rules generally do not record internally built brands, software, customer relationships, or research as assets. A software or consumer brand company can have enormous value and small book value, producing a very high P/B that says little.
- Share buybacks: companies that buy back large amounts of stock reduce shareholders’ equity. Some profitable companies even have negative book value as a result.
- Stale asset values: assets recorded at historical cost may be worth much more or much less today.
- Write-downs: book value can drop suddenly if a company writes down goodwill or other assets.
Using it well
Use price-to-book for financial and asset-heavy companies, pair it with ROE, and compare within the same industry. For most technology and consumer companies, earnings-based and cash-flow-based measures are more informative. See our P/E ratio guide for the most common alternative.
