The price-to-book ratio (P/B) is one of the oldest valuation metrics in investing. It compares what the market thinks a company is worth to what the company's accounting records say it is worth.
The Formula
P/B Ratio = Market Price Per Share / Book Value Per Share
Book value per share = (Total Assets - Total Liabilities) / Shares Outstanding
If a stock trades at $50 and its book value per share is $25, the P/B ratio is 2.0. The market values the company at twice its accounting book value.
What It Tells You
P/B below 1.0: The stock is trading below its book value. The market values the company at less than its net assets. This could mean it is undervalued, or it could mean the market sees problems the balance sheet does not reflect.
P/B of 1.0 to 3.0: Typical range for many companies. The market values the company at a modest premium to its assets.
P/B above 3.0: The market values the company significantly above its book value. Common for companies with strong intangible assets (brand, intellectual property, technology) that do not fully appear on the balance sheet.
When P/B Is Most Useful
The P/B ratio works best for:
- Financial companies (banks, insurance) where assets are mostly financial instruments that are marked to market value
- Asset-heavy companies (real estate, manufacturing) where tangible assets make up a large portion of value
- Value investing where you are looking for stocks trading below their intrinsic value
When P/B Is Less Useful
The P/B ratio is less meaningful for:
- Technology companies where the primary assets are intellectual property, software, and human capital (not reflected on the balance sheet)
- Service companies where physical assets are minimal
- Companies with significant goodwill from acquisitions (inflates book value)
A software company might have a P/B of 15 or higher. That does not mean it is overvalued. It means most of its value comes from intangible assets.
How Value Investors Use It
Benjamin Graham, the father of value investing, famously looked for stocks trading below book value (P/B under 1.0) as potential bargains. Warren Buffett expanded this by looking for companies trading at reasonable P/B ratios with high returns on equity.
The P/B ratio is most powerful when used alongside other metrics (P/E ratio, ROE, debt-to-equity) rather than in isolation.
The Progressive Trailblazer pulls valuation data directly from SEC filings. Educational only. Not financial advice.