Price-to-Book Ratio (P/B)

The Price-to-Book (P/B) Ratio divides a company's stock price (or market cap) by its book value (or total shareholders' equity). It compares the market's valuation to the accounting value of the company's assets.

Formula

P/B Ratio = Market Cap ÷ Book Value

Alternatively: P/B Ratio = Stock Price ÷ Book Value Per Share

Book Value = Total Assets - Total Liabilities

Example

JPMorgan Chase (JPM) might have book value of $200 billion and market cap of $500 billion, for a P/B ratio of 2.5. Bank of America (BAC) might have book value of $250 billion and market cap of $400 billion, for a P/B ratio of 1.6.

How to Interpret It

• P/B < 1.0: The stock trades below book value, possibly undervalued or signaling market concern about asset quality.
• P/B 1.0-2.0: Reasonable valuation; common for stable, mature companies.
• P/B > 3.0: The stock is expensive relative to assets, typical for high-growth or high-return-on-equity companies.
• Rising P/B: Investors are paying more for each dollar of assets, often due to improved profitability or growth expectations.
• Declining P/B: Investors are discounting the assets, possibly due to profitability concerns or falling ROE.

Limitations

• Book value is accounting value, not market value; intangible assets (brands, patents, customer relationships) are often not reflected in book value.
• Asset-light businesses (software, advertising) have low book value but high market value, producing high P/B ratios.
• Book value can be manipulated by write-ups, write-downs, or acquisitions (goodwill increases book value without a cash outlay).
• For asset-heavy industries (banks, insurance, utilities), P/B is more useful; for tech or services, it's less meaningful.
• Companies with low or negative ROE should trade at P/B < 1.0; if they don't, there's a warning sign.

Related Terms

• Book Value — shareholders' equity on the balance sheet
• P/E Ratio — price divided by earnings
• Price-to-Sales Ratio — price divided by revenue
• Return on Equity — profit divided by book value, shows how efficiently the company uses assets