The price-to-book ratio formula
The price-to-book ratio is the share price divided by book value per share: P/B ratio = share price ÷ book value per share. The share price is what one share costs on the market. The book value per share is the shareholders’ equity divided by the number of shares outstanding. The answer is a plain number: 3.00 means three dollars of price for each dollar of book value. Try the numbers on the price-to-book ratio calculator and it does the division for you.
Step 1: find the share price
Start with the market. The share price is what one share costs today — the price on the exchange, not the price you paid for it. Here is the worked example: a share price of $150.00.
Step 2: find the book value per share
Start with the company’s accounts. Book value is what is left when you take everything the company owns and subtract everything it owes — total assets minus total liabilities, which is the shareholders’ equity. Book value per share is the shareholders’ equity divided by the number of shares outstanding. Here is the worked example: book value per share of $50.00.
Step 3: divide and read the answer
Divide the share price by the book value per share. Here is the worked example: $150.00 ÷ $50.00 = 3.00. The arithmetic is $150.00 divided by $50.00, which is 3.00, so the stock trades at three times its book value. The answer is a plain number — write it as 3.00.
Three worked examples
Example one — the headline numbers. A share costs $150.00, and the company holds $50.00 of book value per share. The P/B ratio is $150.00 ÷ $50.00 = 3.00. The market pays $3 for each $1 of book value, so the stock trades at three times its net assets.
Example two — how high a price for a 4.00 P/B? The same company holds $50.00 of book value per share, and you want a 4.00 P/B. The share price needed is 4.00 × $50.00 = $200.00 — the price for a 4.00 P/B on the book value it already has. The price-to-book ratio calculator runs the reverses for you.
Example three — how little book value for a 4.00 P/B? The same company costs $150.00 a share, and you want a 4.00 P/B. The BVPS needed is $150.00 ÷ 4.00 = $37.50 — the book value for a 4.00 P/B on the price it already has. Less book value than that, and the P/B rises above 4.00.
One reverse to check your answer
Work the numbers backwards. A company holds $50.00 of book value per share, and you want its P/B to reach 4.00. The smallest whole-cent share price for the P/B to reach the target is $200.00. A cent less, and the price falls short of the $200.00 needed. The price-to-book ratio calculator runs the reverses for you.
Share price vs book value per share
The share price is what the market charges for the share — the price on the exchange, which moves every day — while the book value per share is what the company holds for each share — the shareholders’ equity divided by the shares outstanding, which moves only when the accounts are published. They are the two halves of the P/B: the price is the “P”, and the book value is the “B”. Here is the worked example: a share price of $150.00 and book value per share of $50.00 give a P/B of 3.00. Find the share price on the exchange and the book value per share in the balance sheet.
What a P/B below 1.00 means
A P/B below 1.00 means the market values the company at less than its net assets — the market is charging less than one dollar of price for each dollar of book value. It can mean the assets are worth less than the books say — or it can mean the stock is cheap for its net assets. A P/B below 1.00 is not a buy signal on its own: check whether the assets are really worth their book value and whether the company is losing money.
What a P/B at 3.00 means
A P/B at 3.00 means the market pays $3 for each $1 of book value — the market expects the assets to earn more than their book value, or the stock is expensive for its net assets. Here is the worked example: a $150.00 share price on $50.00 of book value is a 3.00 P/B. The idea was popularised by Benjamin Graham, who looked for stocks selling below their book value — a margin of safety between the price and the net assets.
What a P/B above 4.00 means
A P/B above 4.00 means the market pays more than $4 for each $1 of book value — the market expects the assets to earn far more than their book value, or the stock is expensive for its net assets. A P/B above 4.00 is not a sell signal on its own: software companies carry little on the balance sheet and trade at high P/Bs that say nothing about their worth, so a 4.00 P/B in software and a 4.00 P/B in banking are different stories.
Trailing vs forward book value
The trailing book value uses the last reported balance sheet — what the company actually owns and owes. The forward book value uses forecast assets and liabilities — what the company is expected to own and owe. Use the trailing book value when you want facts, and the forward book value when you want the market’s guess. Never mix them: a trailing P/B against a forward P/B is two different measures. Book value is backward-looking: assets sit on the books at what they cost, not what they would fetch today, so a P/B built on stale asset values is a P/B built on sand.
The P/B vs the P/E
The price-to-earnings ratio is the share price divided by earnings per share — price per dollar of earnings — while the P/B is the share price divided by book value per share — price per dollar of net assets. The P/E tells you what the market charges for the earnings; the P/B tells you what the market charges for the net assets. Banks and insurers are the classic P/B stocks — most of their value sits in financial assets that are marked close to book. Check both before you judge. Read the guide to the price-to-earnings ratio and try the price-to-earnings ratio calculator and the PEG ratio calculator for the growth side.