Understanding Price to Book Ratio

Price to book value essentially determines the value given by the market for each rupee of the company's net worth. Book value refers to how much an investor would receive if the company sold off its assets and paid off all its debts. Book value shows the actual value of the company. This ratio is calculated by the Current Price divided by the Book Value Per Share. This metric helps to understand whether the company is overvalued or undervalued.

The formula to derive Price to Book Value



Current Price - It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as the market value.

Book Value Per Share - It indicates the company's net asset value on a per share basis. The formula to calculate Book Value Per Share (BVPS) is (Total Assets - Total Liabilities / Total Outstanding Shares)

Example of Price to Book Value Ratio: The current Stock Price of Punjab National Bank is Rs.42.55 Cr., and Book Value Per Share is Rs.88.29.
The value as per the formula (Current Price / Book Value) is calculated as (42.55 / 88.29) = 0.48.

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Key Highlights

The price to book ratio is calculated by Current Price divided by Book Value Per Share.

A ratio below one is generally considered good. It indicates that the company's stock is undervalued and trading at less than its book value.

Price to Book Value is more effective for companies that have large capital expenditures or that operate in capital-intensive industries (like telecommunications, automobile manufacturing, steel production, oil production, refining, etc.), that means they need a heavy or large number of assets.

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While looking at the Price to Book Value, the following points should also take into consideration:

A low PB ratio is considered good. It indicates that the company's stock is undervalued and trading at less than book value, and a higher indicates that the stock is overvalued and trading at a higher price than book value.

The ideal P/B ratio for most of the industry is 1 or lower, but investors generally consider companies that have pb ratio under 3 or 1. And it changes from one industry to another.

The Price to Book Value indicates how much investors are paying in stock price relative to the net value of the company's assets.

Expenses like research and development decrease a company's book value. It's also possible that these R & D expenses will lead to new patents that will eventually pay royalties to a company. It's also possible that these R & D expenses will lead to new patents that will eventually pay royalties to a company. R & D initiatives can boost stock prices in spite of accounting principles that favour conservative capitalization, leading to a wide variation between book and market equity values.

Intangible assets such as brand value are not recorded in accounting until they are acquired. As a result, companies immediately deduct all costs related to creating intangible assets.

A company's negative book value suggests that its liabilities exceed its assets or that it may be insolvent. However, this does not necessarily imply that a company is a bad investment; investors must also consider other factors.

This metric is more useful for capital-intensive companies, that require a high amount of assets. If the Price to Book ratio is negative, it indicates that the company is insolvent, which means that the company has higher liabilities than its assets. This means the company is in huge debt and has insufficient funds to pay back its debts.

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How to Use Price to Book Value Effectively

Investors should look for a low Price to Book Value ratio. Generally, a ratio below one is considered good.

Price to Book Value is more effective for companies that have large capital expenditures or that operate in capital-intensive industries (like telecommunications, automobile manufacturing, steel production, oil production, refining, etc.), that means they need a heavy or large number of assets. And it is also widely used to compare banks, because in banks most of the assets and liabilities are constantly valued at market values.

Many investors and investment managers use this metric to determine optimal asset allocation and which assets are undervalued and overvalued.

For better analysis, always compare companies that operate in the same sector and also look at other financial metrics like PE ratio, Earnings Yield, Enterprise Value to Revenue, Return on Asset (ROA), Return on Equity (ROE), Asset Turnover Ratio, etc.

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