Price-to-book ratio
What is Price-to-book ratio?
Price-to-book compares the market value of common equity with the accounting book value attributable to common shareholders. Its relevance depends heavily on how faithfully recorded assets and liabilities represent the economics of the business.
Why price-to-book is used
P/B is often applied to banks, insurers, and asset-intensive companies where balance-sheet equity is economically relevant. The multiple reflects expected return on equity, growth, risk, and the reliability of recorded assets and liabilities. A company expected to earn sustainably above its cost of equity can justify a multiple above one.
How it is calculated
Divide share price by book value per diluted common share, or market capitalization by common shareholders' equity. Remove preferred equity and other non-common claims consistently. Analysts may use tangible book value after excluding goodwill and selected intangibles, but tangible P/B is a different measure and must be labeled separately.
Example
A bank has common equity of $10 billion and market capitalization of $12 billion, producing P/B of 1.2 times. If expected return on equity falls below the required return, the market may value the bank below book. That discount is not automatically a bargain because future losses can reduce the book value denominator.
How to interpret it
Compare firms with similar asset quality, accounting, leverage, profitability, and business mix. Connect P/B with sustainable return on equity and cost of equity. Review reserves, unrealized gains and losses, goodwill, and off-balance-sheet exposures. For asset-light companies, internally developed intangibles can make reported book value a poor representation of invested economic capital.
Limitations
Book value is an accounting residual, not liquidation or intrinsic value. Historical cost, impairment, revaluation, and consolidation policies differ. Buybacks, acquisitions, and accumulated losses can distort comparisons. Negative equity makes the ratio meaningless. Cross-border comparisons require careful treatment of accounting standards, regulatory capital, currency, and inflation.
Practical checklist
Use common equity and the correct diluted share count, reconcile reported and tangible book value, and inspect asset quality and liability measurement. Compare P/B with return on equity, growth, credit losses, and capital requirements. Mark negative book value as not meaningful and avoid applying a financial-sector P/B framework indiscriminately to asset-light businesses.
Also known as: P/B ratio, price-to-equity ratio
Sources and further reading
- Market-Based Valuation: Price and Enterprise Value Multiples, CFA Institute