Price to book ratio

A ratio compares the price the market puts on a stock to something the company actually produces, 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, which is total shareholders' equity, the accounting value of everything the company owns minus everything it owes. It shows how much investors are paying relative to the company's net assets on paper.

The formula is: Market cap / Book value.

P/B is most useful for asset-heavy businesses like banks or industrial companies, where the balance sheet closely reflects the business's actual worth. 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.