What is Price-to-Book Value Ratio (P/BV Ratio)?

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Price to Book Ratio is an important metric used by an investor in making trade related decisions before buying a stock. It is also known as a price-equity ratio. The P/B Ratio, as a whole, denotes the relationship between the value of a firm’s outstanding shares and the book value of its equity. Investors typically use this metric to understand if a company’s stocks are overvalued or undervalued.

For example- If you want to compare two stocks with the same kind of growth & profitability, P/B can be a handy metric for determining the best value at a given time.

Formula and Calculation of the Price-to-Book (P/B) Ratio

The calculation of Book value per share is as follows:

P/B Ratio= Market Capitalization / Book Value of Assets

Also, it is of prime importance to study a company’s balance sheet to determine its book value. If the P/B Ratio is in the lower range, it reflects that the stock is undervalued. It may also mean that the company might be in a challenging phase. This ratio, just like all other ratios, is industry specific. It tends to differ from industry to industry.

What can the P/B Ratio indicate?

The Price-to-Book Ratio is referred by investors to find out company stocks that are undervalued. It depicts the relationship between how the market sees the value of a company’s equity and the real value of its equity. A company’s market value is its share price multiplied by the number of outstanding shares. The net assets of a company are its book value.

P/B Ratios and Public Companies

It’s difficult to comment on what can be a “good” price-to-book ratio as a ratio analysis is industry specific. What can be considered an ideal P/B ratio for one industry can be a poor one for another. Hence, for a better understanding, you must set some specific parameters.

The P/B ratio has been used for decades by market analysts to make trade decisions.

Typically, any P/B value below one is a good one for value investors and is indicative of an undervalued stock.

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