July 09, 2025
4 mins read
When investors consider buying a company’s shares, they often use specific financial ratios to decide if it’s the right move. One such commonly used ratio is the Price-to-Book (P/B) ratio, also known as the Market-to-Book ratio.
The Book-to-Market ratio illustrates the relationship between a company’s book value (its worth on paper) and its market value (what people are willing to pay for its shares).
Let’s break it down with an example:
If a company’s share trades at ₹150 in the market and its book value per share is ₹100, the P/B ratio is:
150 ÷ 100 = 1.5 This means the market is willing to pay ₹1.50 for every ₹1 of the company’s net assets.
So essentially, the P/B ratio tells us how the market values a company compared to the value of what it owns. To make the comparison more meaningful, both values are often calculated on a per-share basis. That means:
Market value per share = Total market value ÷ Total shares
Book value per share = Total net assets ÷ Total shares
The book-to-market ratio helps investors compare a company’s actual accounting value to its market value. The book value is what’s left after subtracting liabilities from assets, while the market value is calculated by multiplying the current share price by the total number of shares. This ratio is a handy tool for evaluating whether a company might be undervalued or overvalued in the stock market.
The Book-to-Market ratio is simply the book value divided by the market value of the company. It helps investors judge whether a stock is priced fairly. The formula is:
Book-to-Market Ratio = Common Shareholders’ Equity ÷ Market Capitalization
The company might be undervalued. This often attracts value investors because the stock is cheaper than the actual value of the company’s assets.
The stock may be overvalued. Here, investors are paying more than what the company is worth on paper. However, this could also mean that investors expect strong future growth, particularly in sectors such as technology, where physical assets are minimal.
Both ratios are used to compare a company’s actual worth to what it’s trading for in the stock market, but they’re just inverted versions of each other.
Market-to-Book (P/B) = Market Value ÷ Book Value
Book-to-Market = Book Value ÷ Market Value
So, a P/B ratio over 1 suggests a company might be overvalued, while a Book-to-Market ratio over 1 suggests it might be undervalued.
In short, whether you use the Book-to-Market or Market-to-Book ratio, both help investors figure out if a company’s shares are priced higher or lower than they should be based on its actual value.
Value investors are on the lookout for stocks that appear to be cheaper than their actual worth. A low P/B ratio might indicate that a stock is undervalued, and that’s exactly what value investors want to spot.
However, it’s essential to recognise that the meaning and usefulness of the Price-to-Book (P/B) ratio can vary significantly across different industries. There is no one-size-fits-all value that works across all sectors. For a fair comparison, companies should ideally be evaluated within the same industry using similar benchmarks.
Because of this, relying solely on the P/B ratio may give a skewed picture. That’s why many investors also consider other financial metrics, along with the P/B ratio, to gain a more accurate understanding of whether a stock is undervalued or overpriced.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Bajaj Broking Financial Services Ltd. (BFSL) makes no recommendations to buy or sell securities.
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A high Book-to-Market ratio suggests the company’s stock might be undervalued. It means the market price is low compared to the actual book value, often attracting value investors seeking potential opportunities.
Investors use this ratio to compare a company’s actual worth (book value) to its market price. It helps them judge whether a stock is priced fairly, undervalued, or overpriced based on its underlying assets.
It’s useful for value investors, analysts, and fund managers. It helps them identify undervalued companies, compare stocks within the same industry, and make more informed decisions about potential investments.
Divide the company’s book value (total assets minus liabilities) by its market value (current share price multiplied by total shares). The result shows how the market values the company compared to its actual worth.
They’re opposites. Book-to-Market is book value divided by market value, while Price-to-Book is market value divided by book value. Both show valuation insights but from different angles, helping investors analyse stocks more effectively.
Not always. It’s less effective for industries with primarily intangible assets, such as tech or service companies. For asset-heavy industries, it works better. So, comparisons should be made within the same industry for accuracy.
It helps investors identify whether a stock is trading below its actual worth, which may signal a good buying opportunity. It’s a key metric in value investing and comparing companies in the same sector.
It ignores future growth potential and doesn’t account for intangible assets. It may also mislead in industries with fewer physical assets. That’s why it’s best used in conjunction with other financial indicators to provide a more comprehensive picture.
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