Additional Resources

  1. Chapter 4 Market-based Valuation: Price Multiples [faculty.etsu.edu]
  2. Price To Book Ratio As A Valuation Model: An Empirical Investigation* [citeseerx.ist.psu.edu]
  3. Book-to-market Ratios As Predictors Of Market Returns [www2.bc.edu]
  4. The Relationship Between Market Price And Book Value For Regulated ... [ufdcimages.uflib.ufl.edu]
  5. Relationship Between Stock Return, Dividend-price Ratio, Price ... [academia.edu]
  6. The Relationship Between Return, Price To Earnings Ratio, Price To Book ... [academia.edu]

Price-to-Book Ratio

The price-to-book ratio, also known as P/B ratio or price-to-equity ratio, is a type of financial ratio which is primarily used to compare the organization’s net assets that are available for common stockholders, relative to the actual sales price of the stocks.

In other words, this ratio is used to evaluate a share’s market value to the shares book value. The ratio is derived by simply dividing the stock’s recent closing price by the book value per stock of the latest quarter.

Formula

P/B= Stock Price/ [Total Assets - Intangible Assets & Liabilities]

OR

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

Price-to-Book Ratio Analysis

The calculations from this formula are then used to analyze the stock performance of the company. If the ratio is over 1, it means the market is primarily willing to offer more than the equity/ share. However, if the ratio is below 1, it shows that the market is willing to offer a price lower than the equity/share.

A low price-to-book ratio usually means that the stock or share is either undervalued or that there is something fundamentally going wrong within the organization. The company is not performing at par.

The price-to-book ratio also gives investors an idea of whether the company is paying more for what would otherwise be left if in case the company goes bankrupt.

For firms in distress, the book-value is calculated without taking into account intangible assets as they would have zero resale value.

Advantages of Price-to-Book Ratio

Speculators find this financial ratio quite useful as it provides them a relatively intuitive and stable metric which can be used to compare the prevailing market price. Besides this, the price-to-book ratio can be utilized by companies with negative earnings but positive book values.

Underlying Factors that Can Affect the P/B Ratio Calculations

Some factors that may affect P/B ratio calculations are:

  • New stock issuance
  • Dividend payouts
  • Stock repurchases
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