Price-to-book (P/B) ratio

Definition

The price-to-book (P/B) ratio is a financial metric used to compare a company's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

5 Must Know Facts For Your Next Test

1. A P/B ratio below 1 indicates that the stock may be undervalued.
2. A high P/B ratio could signal overvaluation or high future growth expectations.
3. Investors often use the P/B ratio in conjunction with other metrics like P/E ratio for comprehensive analysis.
4. Book value is derived from a company’s balance sheet and represents total assets minus liabilities.
5. The P/B ratio can vary significantly across industries; capital-intensive industries typically have lower P/B ratios.

Review Questions

• How is the price-to-book (P/B) ratio calculated?
• What does a P/B ratio below 1 signify?
• Why might investors look at both P/B and P/E ratios when evaluating a stock?

Related terms

Price-to-Earnings (P/E) Ratio: A valuation metric comparing a company's current share price to its per-share earnings.

Book Value: The net asset value of a company, calculated as total assets minus intangible assets and liabilities.

Market Capitalization: The total market value of a company's outstanding shares, calculated as share price multiplied by number of shares outstanding.