PRICE TO BOOK P/B

The price to book, or P/B, ratio is a way of measuring the relationship between a company’s stock price and its book value. The book value of a company is simply its total assets, less its liabilities, or the part of a company that can be said to be owned by the shareholders. Price to book gives an idea of the market sentiment toward a company, as it demonstrates the premium investors are willing to pay above the actual hard value of the company’s assets. Conversely, a company that has an incredibly low P/B may have structural flaws that make investors unwilling to value the stock at even the value of the company’s assets.

For example, one can imagine a company with a stock price of $60, a book value of $15 million, and one million outstanding shares. To calculate the book value per share, one simply divides the book value by the number of shares, in this case resulting in a $15 value. The P/B is then simply $60/$15, or 4. A P/B of 4 implies that the market believes the company is worth a fair amount more than the worth of its assets. Price to book ratios in the 20 to 30 range imply that a company is valued significantly higher than the worth of its hard assets.

Of course, when using P/B as an indicator of value, one needs to remember that book value is a very crude measurement, and in some cases is essentially useless. For example, book value does not accurately factor in the market worth of intellectual property assets. As a result, a company that primarily markets its intellectual property would appear to have a very low book value. Of course, investors would know that was not the whole story, so the stock would have a much higher value, resulting in a high P/B.