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Definition
The price-to-book ratio, or P/B ratio, can be calculated as follows:
P/B Ratio = Share Price / Book Value per Share
It can also be calculated from the numbers for the whole company:
P/B Ratio = Market Cap / Total Equity
A closely related ratio is called Price-to-Tangible-Book Ratio. The difference between Price-to-Tangible-Book Ratio and Price-to-Book Ratio is that book value other than intangibles are used in the calculation.
Formula
P/B Ratio =
Market Cap /
Total Equity Explanation
Unlike valuation ratios relative to the earning power such as P/E ratio, P/S ratio or Price-to-Free-Cash-Flow ratio, the Price-to-Book Ratio measures the valuation of the stock relative to the underlying asset of the company.
The Price-to-Book Ratio works the best for the businesses that earn most of their profit from their assets, e.g. banks and insurance companies.
Beaware
Some businesses have very light assets, such as software companies or insurance agencies. The Price-to-Book Ratio does not work well for these companies. Some companies even have negative equity, so the Price-to-Book Ratio cannot be applied to them.
Related Terms
Market Cap,
Total Equity,
P/E Ratio,
P/S Ratio,
Book Value per Share
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