What is Price-to-Book (PB) Ratio? Meaning, Formula & Examples

Price-to-Book (PB) ratio is a financial ratio used to compare a company’s current market price to its book value. It is an indicator of the company’s financial health and its ability to generate returns for its shareholders.

The Price-to-Book (PB) ratio is calculated by dividing the company’s current market price per share by its book value per share. The book value per share is the amount of the company’s assets minus its liabilities on a per share basis.

The Price-to-Book (PB) ratio is used by investors to get an indication of the company’s overall value. If the ratio is greater than one, it means that the company’s stock is trading at a premium to its book value. On the other hand, a ratio of less than one indicates that the company’s stock is trading at a discount to its book value.

Formula of Price-to-Book (PB) Ratio

The formula for calculating the Price-to-Book (PB) ratio is as follows:

Price-to-Book (PB) Ratio = Market Price of Stock / Book Value per Share

Book Value per Share = (Total Assets – Total Liabilities) / Number of Outstanding Shares

Examples of Price-to-Book (PB) Ratio

Let’s take a look at examples of the Price-to-Book (PB) ratio:

Example 1:

Company A’s current market price is $10 per share and its book value per share is $8.

The Price-to-Book (PB) ratio for Company A is $10/$8 = 1.25.

Example 2:

Company B’s current market price is $20 per share and its book value per share is $15.

The Price-to-Book (PB) ratio for Company B is $20/$15 = 1.33.

In the above examples, the PB ratio is greater than 1, which indicates that the market price of the company’s shares is greater than its book value per share. This means that the stock is considered to be overvalued compared to its book value.

Example 3

Company XYZ has a market capitalization of $1 billion and its book value is $800 million.

Therefore, its PB ratio can be calculated as follows:

PB Ratio = $1 billion / $800 million = 1.25

This indicates that the market perceives Company XYZ to be worth 25% more than its book value.

Other Metrics

It is important to keep in mind, however, that the Price-to-Book (PB) ratio is not the only metric investors should consider when evaluating a company’s stock. Other factors such as earnings, revenues, and growth potential must also be taken into account when making an investment decision.

It is also important to note that the Price-to-Book (PB) ratio can vary significantly from one company to the next. Therefore, it is important for investors to compare the PB ratio of a company to that of similar companies in the same industry before making an investment decision.

Conclusion

The Price-to-Book (PB) ratio is a financial metric that helps investors assess the relative value of a company’s shares compared to its book value. It is calculated by dividing the company’s market price per share by its book value per share. A PB ratio greater than 1 indicates that the stock is overvalued compared to its book value. This ratio can be used to compare the relative value of different companies in the same industry.