Glossary · Stocks and markets
Price-to-book ratio
The price-to-book ratio (P/B) compares a company’s market value with its book value: what its assets minus its debts are worth in its accounts.
Also called: P/B ratio, price/book, market-to-book
In plain words
A small shop owns a building, goods and cash worth $500,000 on paper, and owes the bank $300,000. What belongs to the owners on paper is $200,000: its book value. If someone offers $300,000 for the whole shop, they pay 1.5 times book, a price-to-book ratio of 1.5.
For a listed company it is the market value ÷ the shareholders’ equity in its latest balance sheet or, per share, the share price ÷ book value per share.
A P/B below 1 means the market values the company at less than its net assets on paper. Investors either think those assets are worth less than the books say, or expect losses to eat into them; sometimes they are simply too gloomy.
Example
A bank and a software company
- A bank has $1,000 billion of loans and other assets and owes $900 billion to depositors and lenders: a book value of $100 billion. Its shares are worth $110 billion: P/B = 1.1.
- A software company has $20 billion of assets and $10 billion of debts: a book value of $10 billion. Its shares are worth $200 billion: P/B = 20.
- The software company’s real assets (its code, its brand, its customers) barely appear on its balance sheet, so its book value says little about it.
P/B is most useful for businesses whose assets are mostly money or things, such as banks and insurers.
One level deeper
Book value follows accounting rules: most assets are carried at what they cost, minus depreciation, not at what they would sell for today. A factory bought decades ago, or land in a city center, can be worth far more than its book value; a warehouse of unsold goods, far less.
Intangible assets that a company builds itself (research, software, brands) mostly do not appear on the balance sheet at all, while those it buys show up as goodwill. That is why P/B fell out of favor for tech companies, and why many analysts prefer the P/E or enterprise value.
Large buybacks shrink book value too: a company that has bought back a lot of stock can even end up with negative equity, which makes P/B meaningless. In the research of Eugene Fama and Kenneth French, a low price-to-book ratio is the classic definition of a value stock.
Why it matters
For banks and insurers, whose assets are mostly financial and valued close to market prices, P/B is a standard yardstick.
It helps spot companies priced below what they own, and the ones where the market expects trouble.
It is the measure behind the long debate on value versus growth investing.
A common mistake
Myth: A stock trading below book value can’t lose much.
In fact: Book value can vanish fast. A bank’s bad loans or an insurer’s claims can wipe out its equity, and several banks traded near or below book value shortly before failing, in 2008 and again in 2023.
Questions people ask
What is a good price-to-book ratio?
It depends on the industry: banks often trade near 1, asset-light companies such as software firms at 10 or more. Compare a company with its peers and with its own history.
What does a P/B below 1 mean?
The market values the company at less than its net assets on paper. Investors may think those assets are overstated, or that the company will lose money; occasionally the market is simply too pessimistic.
How do you calculate book value per share?
Take total shareholders’ equity from the balance sheet (assets minus liabilities, minus any preferred stock) and divide it by the number of common shares outstanding.
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About the numbers
- This page explains a term. It is not investment advice.