Canadian Finance Blog

What Is A Price To Book Ratio (P/B Ratio)?

Posted: 10 Jan 2011 02:00 AM PST

Price To Book Ratio, often simply referred to as P/B Ratio, can be used to make a comparison between the current market price of a stock and the total book value of all the assets that company has on their balance sheet. While P/E Ratio can help you find value stocks based on earnings, Price To Book Ratio allows you to look for value stocks by finding companies that are not heavily overvalued compared to what their assets are worth.

Price To Book Ratio can be calculated as the total price of all outstanding shares (market capitalization) divided by the total book value of that company’s assets. You can also calculate P/B Ratio as the price per share divided by the book value per share. Either way will give you the same ratio, just a matter of want information you’re looking at; total or per share.

P/B Ratio =

_Market Capitalization_
Total Book Value of Assets

P/B Ratio =

Price Per Share
Book Value Per Share

So what does a P/B Ratio of 1.0 mean? That would mean you can buy that stock for exactly what it’s assets would be worth if it were to go bankrupt today. A ratio of 0.75 would mean you can actually buy shares in the company for less that the value of all their assets. Keep in mind though with any value calculation, sometimes stocks are low for good reason. A low Price To Book Ratio can mean that the company is in trouble and you should look into whether they are truly a “value”.

Another thing to keep in mind with calculations like this is that what would be considered a low Price To Book Ratio for one sector might not be for another. So compare stocks within the same type of industry when value investing.

What Is A Price To Book Ratio (P/B Ratio)? originally appeared on Canadian Finance Blog on January 10, 2011.