What Is the Price-to-Book Ratio?
The price-to-book ratio, or P/B, compares a company's market value with its book value, what it is worth on paper.
How to calculate P/B
Market cap÷Book value=P/B
A bank is worth $200 billion on the market and has a book value of $160 billion. Its P/B is 1.25.
What is a good P/B ratio?
A P/B below 1 means the market values the company at less than its paper value. That can be a bargain, or a sign of trouble. Banks often trade around 1 to 2. Software companies can trade at 10 or more, because their main assets are not on the balance sheet.
When to use P/B
It works best for banks, insurers and companies with lots of physical assets. For tech and brand-driven companies, book value misses most of what they are worth, so P/B says little.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Book valueWhat the company is worth on paper.
P/E ratioHow many years of profit you pay for in a share.
Return on equityProfit made with the owners' money.
Balance sheetShows what a company owns and owes.
Value investingBuying good companies for less than they are worth.
Undervalued vs overvaluedWhen the price is below or above the real value.