Advertisement

Price/book ratio

The price to book ratio (p/b ratio) is calculated by dividing the current share price by its book value per share.

Updated August 2018

Book value is also known as equity, shareholders' funds, or net asset value (NAV). It is the value of all of a company's assets, less all of its liabilities (debts).The number can easily be found on the balance sheet in a company's annual report.

Book value is sometimes used as an estimate of what a company would be worth if all of its assets were sold for their balance-sheet values. It's often used as a way to value companies such as banks, housebuilders, and insurers.

Advertisement - Article continues below

When you know the book value, you can get an idea of how cheap or expensive a share is by dividing the share price by the book value per share (hence the price/book, or p/b, value ratio). A p/b of below one means that technically speaking you are able to buy the company for less than its assets are worth on paper. In other words, if you could buy the whole company, you could sell everything it owned, and still make a profit.

One potential problem with this, of course, is that the book value of a company may not reflect what you would actually get were you to sell its assets. In particular, it may contain lots of "intangible assets", such as goodwill (which often relates to the value of a "brand"), which unlike a factory or a piece of land can be very tricky to measure objectively.These intangibles may in fact not be worth very much at all particularly not in a firesale.

So just as with the price/earnings ratio, an unusually low p/b number could indicate a company in trouble, rather than a potential bargain. By subtracting the intangible assets from a company's book value, you end up with a more conservative number, known as "tangible" book value, based on hard assets, such as land, buildings, machinery, stocks and cash.You can then divide this figure by the number of shares to get tangible book value per share. If you can buy a stock for a lot less than this figure (a relatively rare event), you may be getting a genuine bargain.

See Tim Bennett's video tutorial on the price to book ratio: Beginner's guide to investing: the price-to-book ratio

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/spending-it/glossary/601300/quantitative-investing
Glossary

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020
Visit/glossary/quantitative-easing-qe
Glossary

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020
Visit/glossary/600702/emerging-markets
Glossary

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

Visit/investments/commodities/industrial-metals/601401/money-printing-infrastructure-base-metals-copper
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/investments/funds/601385/in-support-of-active-fund-management
Funds

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020