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  5. Price-to-Book Ratio

Price-to-Book Ratio

Market capitalization divided by net book value, indicating how much investors pay per dollar of assets.

Investment ManagementFinancial Reporting

FAQs

Does a P/B ratio below 1 always mean a stock is cheap?

Not necessarily. A P/B below 1 can signal genuine undervaluation, but it can also reflect poor asset quality, persistent losses, or structural decline. Banks with impaired loan books or manufacturers with obsolete equipment may trade below book for valid reasons—investors should investigate the quality of assets before concluding a stock is cheap.

Why is P/B less useful for technology companies?

Tech companies derive most of their value from intangible assets—software, brand, talent, data—that are largely absent from GAAP balance sheets. Book value understates economic worth, making P/B misleadingly high. For these companies, metrics like P/E, EV/revenue, or DCF-based analysis are more informative.

What is the relationship between P/B and ROE?

Companies with high return on equity (ROE) deserve higher P/B ratios because they are generating strong returns on their book asset base. The Gordon Growth Model implies P/B = (ROE − g) / (r − g), where r is the cost of equity and g is growth. High ROE drives high P/B; low ROE should mean P/B converges toward 1 or below.

Related Terms

Price-to-Earnings Ratio

A valuation metric comparing a company's stock price to its earnings per share, indicating how much investors pay for each dollar of earnings.

Enterprise Value

The total value of a company available to all capital providers — equity holders and debt holders — used as a basis for acquisition pricing and valuation multiples.

Return on Equity

A profitability ratio measuring how much net income a company generates per dollar of shareholders' equity.

Comparable Company Analysis

Valuing a company using trading multiples from publicly listed peer companies.

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The price-to-book ratio (P/B ratio) compares a company's market capitalization to its book value (net assets = total assets minus total liabilities), giving investors a sense of how much they are paying for each dollar of accounting net worth. P/B = Market Price per Share / Book Value per Share. A P/B ratio below 1.0 theoretically means the market values the company at less than the liquidation value of its assets—a potential signal of deep value or financial distress. A high P/B ratio suggests investors expect the company to generate returns well above its cost of capital, justifying a premium to accounting book value. The P/B ratio is most meaningful for asset-heavy industries like banking, insurance, real estate, and manufacturing, where book value reliably reflects underlying asset worth. For asset-light technology and services businesses, book value is largely irrelevant—a company like Google has enormous economic value from intangibles (brand, algorithms, user data) that never appear on the balance sheet under GAAP. In banking, price-to-tangible book value (P/TBV)—which excludes goodwill and intangible assets—is the preferred metric for assessing whether bank stocks are cheap or expensive relative to their hard asset base. The P/B ratio is a foundational metric in value investing, popularized by Benjamin Graham, who argued that buying stocks below book value provided a margin of safety. Empirical research by Fama and French found that value stocks (low P/B) have historically outperformed growth stocks (high P/B) over long periods, forming the basis of the value factor in multi-factor asset pricing models.