Price to Book

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The Price To Book Ratio equals the share price divided by the book value per share.

The Price to Book Ratio (alternately Price to Book, Price to Book Value, P/B, or P to B) is a financial metric used to compare a company's book value to the share price at which it is currently trading. It is generally calculated by dividing the share price by the book value per share, though it can also be calculated by dividing the company's market capitalization by the total book value listed on the balance sheet.

The Price to Book Ratio varies dramatically between industries. A company that requires more assets (e.g. a manufacturing company with factory space and machinery) will generally post a drastically lower price to book than a company whose earnings come from the provision of a service (e.g. a consulting firm).

Price to Book is often used to gauge a stock's relative value. A company trading at a low price to book, particularly when compared to other companies in its industry, is thought to be undervalued relative to its share price. However, a low price to book could also be an indication of low forward looking investor confidence in the company (e.g. poor earnings projections) or a disproportionate amount of Intangible assets on the books (see below section). As such, when used for security analysis, price to book is often coupled with metrics such as P/E, PEG, Return on Equity, and the Current Ratio to get a better snapshot of the company as a whole.

Tangible vs. Intangible Assets

Generally speaking, P/B is a measure of the share price relative to the value of the company's total assets minus its liabilities, per share. However, in some calculations intangible assets and liabilities and goodwill are removed from the equation as their value is significantly more subjective and could have no resale value. In this case, the ratio may be reffered to as "Price to Tangible Book Value".

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