Understanding Price to Book Value
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 all its debts. Book value shows the actual value of the company.
This ratio is calculated by Current Price divided by 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 market value.
Book Value Per Share -
It indicates the company's net assets 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.
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 a book value.
Price to Book Value is more effective for companies that have large capital expenditures or that operate in capital-intensive industries means that needs a large number of assets like Telecommunications, automobile manufacturing, steel production, oil production, refining, etc.,
While looking at the Price to Book Value, the following points should also take into consideration:
Low P/B Ratio is considered good. It indicates that the company's stock is undervalued and trading at less than a book value, and a higher indicates that the stock is overvalued and trading high than a book value.
Price to Book Value indicates how much investors are paying in stock price relative to the net value of the company's assets.
This metric is more useful for capital-intensive companies which need 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 insufficient to pay back its debts.
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 means that needs a large number of assets like Telecommunications, automobile manufacturing, steel production, oil production, refining, etc., and this metric is also widely used to compare banks because banks most of the assets and liabilities are constantly valued at market values.
Many investors and investment managers used 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
||Screener at TSR
|0 to 0.5
|| Strong Bullish
|0.5 to 1
|1 to 1.5
|| Mild Bullish
|1.5 to 2.2
|2.2 to 4
|| Mild Bearish
|4 to 6
|| Strong Bearish
Related Price to Book Screener