P/B Ratio (Price-to-Book Ratio)

The price-to-book ratio, or P/B, is calculated as the share price divided by book value per share. Equivalently, it is market capitalization divided by shareholders' equity.

Example: a stock trades at $30 and has a book value of $20 per share. Its P/B ratio is 1.5, meaning investors are paying $1.50 for every dollar of net assets on the books.

A P/B below 1 means the market values the company at less than its accounting net worth. That can point to an undervalued stock, but it can also reflect doubts about the true value of the assets or about future profitability. Value investors have long used low P/B ratios as a starting point for finding bargains.

The ratio works best for companies whose assets are mainly tangible and fairly valued on the balance sheet, such as banks and insurers. It is less useful for technology and service companies, whose value comes largely from intangible assets that barely show up in book value. Large buybacks or accumulated losses can also make book value very small or negative, which distorts the ratio.

P/B is often considered together with return on equity.