Price to book ratio

A ratio compares the price the market puts on a stock to a measure of the business, such as its earnings, its assets, or its cash flow. It tells you how expensive a stock is relative to that measure, not just whether the share price is high or low in absolute terms.

The price to book ratio divides market capitalisation by book value, the common shareholders' equity on the balance sheet: the accounting value of everything the company owns minus everything it owes, less any preferred stock and minority interest. It shows how much investors are paying relative to the company's net assets on paper.

The formula is:

P/B is most useful for businesses like banks and insurers, whose balance sheets are mostly financial assets carried close to market value, so book value comes closer to the business's actual worth. Physical assets like factories sit on the books at depreciated historical cost, so book value is a looser guide for industrial companies. For companies whose value comes mainly from brand, software, or talent rather than physical assets, P/B can look very high without indicating overvaluation, since most of the real value never appears on the balance sheet at all.