Price to book ratio

A price to book ratio, or price-to-book ratio, often expressed as a P/B ratio, is used to compare a company's current market price to its book value. It is calculated by dividing the company's current share price by its book value per share.^[1]

One way to understand book value is as follows: when a business is liquidated, the book value is what may be left over for the owners after all the debts are paid. Paying only a P/B of 1 means the investor will get all his investment back, assuming assets can be resold at their book value.

Shares of capital intensive industries trade at lower P/B ratios because they generate lower earnings per dollar of assets. Business depending on human capital will generate higher earnings per dollar of assets, so will trade at higher P/B ratios. Value stocks tend to have low P/B ratios, and growth stocks high ones.

See also

• Price to earnings ratio (P/E ratio)

References

External links

• Investopedia, Price-To-Book Ratio (P/B Ratio) Definition
• Wikipedia: P/B ratio