price-to-book ratio
A valuation ratio comparing a company's market price to its book value per share, indicating how much investors pay for each dollar of net assets.
Example
“A P/B ratio of 1.5 means investors pay $1.50 for every $1 of book value — banks typically trade near book value.”
Memory Tip
P/B ratio = market price divided by book value. Below 1 = trading under accounting value.
Why It Matters
The price-to-book ratio helps you understand whether a stock is overpriced or underpriced relative to the company's actual assets. A lower ratio might indicate a bargain investment, while a higher ratio could suggest the market has high expectations for future growth that may or may not materialize.
Common Misconception
Many investors believe that a low price-to-book ratio always means a stock is a good buy, but this ignores the reason why the ratio is low in the first place. A low ratio could indicate that the company is in financial trouble or that its assets are deteriorating, making it a poor investment despite the apparent discount.
In Practice
Imagine Company A has a book value of 10 dollars per share and trades at 50 dollars per share, giving it a price-to-book ratio of 5.0. Meanwhile, Company B has a book value of 10 dollars per share but trades at only 8 dollars per share, resulting in a ratio of 0.8. While Company B appears cheaper, you would need to investigate why it is trading below its asset value before concluding it is the better investment.
Etymology
PRICE (market value) TO (relative to) BOOK (accounting value) RATIO.
Common Misspellings
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