P/B Ratio

A ratio used to compare a stock'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. It is also called as "Price to Equity Ratio". It is calculated as:

P/B ratio = Stock Price / Total Assets – Intangible Assets and Liabilities

A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, this varies by industry. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

Unlike P/E, which is an income statement measure (remember, it uses earnings, which are disclosed on the income statement), P/B looks at a company’s stock price in relation to its book value. Book value is simply a company’s net worth (assets – liabilities). As such, P/B is a balance sheet measurement. As with the P/E ratio, there is more than one way to calculate P/B. For example, some remove from the company’s assets all intangible assets. A P/B of 4, for example, tells you that the price of a stock is 4 times its book, or net asset, value.

Using these and other ratios, stocks can be divided into value and growth. The stocks with the lowest P/E and P/B would be considered value stocks, and the shares with the highest P/E and P/B would be considered growth stocks. Now, there are many other ways to determine value vs. growth. The price-to-book (P/B) isn't always indicative of an undervalued company. Conversely, companies with a relatively high P/B ratio are not necessarily overvalued. P/B is a useful measure for comparing firms that have negative earning; those businesses can't be compared using the P/E ratio. Quite simply, far fewer firms have negative book values.The P/B ratio is calculated as follows:

P/B ratio = market capitalization / book value of equity 

(Market capitalization is often abbreviated as "market cap"; book value is often abbreviated as "BV")

Market capitalization = shares outstanding * market price per share

Book value of equity = book value of assets - book value of liabilities

So therefore, P/B = market cap / (BV of assets - BV of liabilities) 

The book values of assets and liabilities are easily found on the balance sheet. The book value of assets is usually classified as "total assets." You may need to do some arithmetic to arrive at the book value of liabilities (it may not be quite so obvious on some balance sheets), but it includes all current liabilities and long-term obligations. The book value of equity is often broken out for us under the heading "Shareholders or Shareowners Equity." In my experience, most financial websites are fairly accurate with P/B ratios.