P/B – Price-to-Book Ratio
Price-to-Book Ratio (P/B) measures how much investors pay for each dollar of equity (net assets) of the company. It's a key indicator for evaluating financial institutions and value stocks.
How P/B is Calculated
Basic formula:
Or per share:
- Shareholders' Equity = Assets − Liabilities
- Book Value per Share = Equity / Number of Shares
Values can be found in the Balance Sheet.
How to Interpret the Result
The value indicates how many dollars investors pay for each dollar of equity.
| P/B | Interpretation |
|---|---|
| < 1 | Below book value – potentially undervalued or problems |
| 1 | At book value |
| 1–2 | Slight premium |
| 2–3 | Standard premium for quality companies |
| > 3 | High premium – strong brand or intangible assets |
Example: A company has market cap of $600 million and equity of $400 million. P/B is 1.5. Investors pay $1.50 for every $1 of book value.
What Affects P/B
P/B depends on return on equity:
| ROE | Typical P/B |
|---|---|
| < 5% | Below 1 (destroys value) |
| 5–10% | 0.5–1.0 |
| 10–15% | 1.0–2.0 |
| 15–20% | 2.0–3.0 |
| > 20% | Above 3.0 |
Companies with high ROE deserve higher P/B.
When P/B is Most Useful
P/B is the preferred indicator for:
- Banks – assets and liabilities are at market values
- Insurance companies – similar to banks
- Holding companies – investment portfolio
- Real estate companies – property value on balance sheet
- Value investing – searching for companies below book value
P/B Below 1 – Opportunity or Trap?
When P/B < 1, the company trades below liquidation value. This may mean:
Opportunity:
- Market overlooks asset value
- Temporary problems that will resolve
- Hidden value in real estate or investments
Trap (value trap):
- Assets are overvalued in accounting
- Company is permanently losing value
- Goodwill or intangible assets without value
- Structural industry problems
Tangible Book Value
For more precise analysis, Tangible Book Value is used:
P/TBV excludes goodwill and intangible assets, which may be overvalued.
Industry Differences
P/B varies dramatically by industry:
- Banks – 0.5–1.5 (book value is relevant)
- Insurance companies – 0.8–2.0 (similar)
- Utilities – 1.0–2.0 (capital-intensive)
- Industrials – 1.5–3.0 (tangible assets)
- Consumer Staples – 3–6 (brands)
- Software – 5–20+ (intangible value)
Why Technology Companies Have High P/B
Technology companies have few tangible assets on balance sheet:
- Value is in software, patents, brand
- These items are not fully captured
- P/B is therefore less relevant
For such companies, it's better to use P/E, P/S, or EV/EBITDA.
How to Use the Indicator in Practice
For comprehensive valuation, combine P/B with:
- ROE – return on equity
- P/E – earnings valuation
- Debt-to-Equity – leverage
- Book value trend – is it growing or declining?
Practical Tip
For banks, P/B is a key indicator. A bank with P/B below 1 and stable ROE above 10% may be attractive. But beware – low P/B at a bank may signal problems with loan portfolio quality or insufficient capitalization. Always verify capital adequacy (CET1) and asset quality.