The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company’s current market price to its book value. The calculation can be performed in two ways, but the result should be the same:
1. The company’s market capitalization can be divided by the company’s total book value from its balance sheet.
2. The second way, using per-share values, is to divide the company’s current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).
As with most ratios, it varies a fair amount by industry. P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values. A higher P/B ratio implies that investors expect management to create more value from a given set of assets. P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders.
This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value. In such cases, P/B should also be calculated on a “diluted” basis, because stock options may well vest on sale of the company or change of control or firing of management.
Example: Google’s Price/Book Ratio: 3.24