P/B Ratio: Meaning, Formula, Good PB Ratio, vs PE Ratio

PB Ratio

Key Highlights

The Price-to-Book (P/B) ratio is a financial metric used to compare a company's market value (price) to its book value (net asset value per share).
P/B Ratio = Market Price per Share/Book Value per Share

What is P/B Ratio?

The Price-to-Book (P/B) ratio is a financial metric used to compare a company's market value (price) to its book value (net asset value per share). It is determined by dividing the current market price per share of a company's stock by its book value per share. This ratio helps investors assess whether a stock is undervalued or overvalued relative to its accounting value on the balance sheet.

P/B Ratio Formula

The formula to calculate the Price-to-Book (P/B) ratio is:

P/B Ratio = Market Price per Share/Book Value per Share

Where:

Market Price per Share: It is the current trading price of a company's stock.
Book Value per Share: It is the total assets minus intangible assets and liabilities, divided by the number of outstanding shares.

What is a Good P/B Ratio?

A good P/B ratio varies by industry and depends on the nature of the business.
Generally, a P/B ratio less than 15 suggests that the stock may be undervalued relative to its book value, indicating a potential buying opportunity.
Conversely, a P/B ratio above 15 may indicate that the stock is overvalued. However, it's important to consider other factors like growth prospects, profitability, and market conditions alongside the P/B ratio before making investment decisions.

Difference Between P/E and P/B Ratio

The main difference between the Price-to-Earnings (P/E) ratio and the Price-to-Book (P/B) ratio lies in what they measure:

P/E Ratio: Compares a organization's current share price to its earnings per share. It reflects investors' expectations of a company's future earnings growth and profitability.
P/B Ratio: Compares a company's market value to its book value, which represents the accounting value of shareholders' equity. It is a more conservative measure of a company's value compared to its earnings potential.