What is the Price-to-Book Ratio?
The Price-to-Book (P/B) ratio compares a company’s market capitalization to its book value (total assets minus total liabilities). Book value represents what shareholders would theoretically receive if the company liquidated all its assets and paid off all debts.
A P/B of 1.0 means the stock trades at exactly its book value. A P/B below 1.0 suggests the market values the company at less than its accounting value — potentially undervalued. A P/B above 1.0 means investors are paying a premium over book value, often because they expect future earnings growth or the company has valuable intangible assets not reflected on the balance sheet.
Why it matters for investors
The P/B ratio is particularly useful for asset-heavy companies like banks, insurance firms, and industrial manufacturers where book value is a meaningful measure of underlying value. For these companies, a P/B below 1.0 can signal a genuine bargain — you’re buying assets for less than they’re worth on paper.
However, P/B ratios are less meaningful for asset-light businesses like software companies or service firms. These companies derive most of their value from intangible assets (brands, intellectual property, customer relationships) that aren’t fully captured in book value. A software company with a P/B of 10 might still be reasonably priced if its earnings and cash flow justify the premium.
How Stock Analyzer scores it
| Score | P/B Range | What it means |
|---|---|---|
| A | Below 1 | Trading below book value — potentially undervalued |
| B | 1 – 2 | Fair value range — reasonable premium to book |
| C | 2 – 3 | Moderate premium — growth expectations priced in |
| D | 3 – 4 | High premium — requires strong growth to justify |
| E | 4+ | Very expensive — significant premium over book value |
What to watch out for
Book value can be misleading if a company’s assets are overstated or its liabilities are understated. Check for large amounts of goodwill from acquisitions — this inflates book value but may not represent real economic value. Also, book value uses historical cost accounting, so assets like real estate or inventory may be worth far more (or less) than their book value suggests.
For companies with significant intangible assets or intellectual property, book value understates true worth. Always compare P/B ratios within the same industry, and consider other metrics like price-to-earnings or free cash flow yield to get a complete picture of valuation.