Price-to-book (P/B)

The ratio of share price to book value per share. Book value is what's left on the balance sheet for equity shareholders after subtracting all liabilities from all assets.

Formula

Book Value per Share = (Total Equity − Preference Capital) ÷ Shares outstanding
P/B = Share price ÷ Book Value per Share
   = Market cap ÷ Total Equity

A P/B of 1.0x means the market is paying exactly book value. P/B above 1.0x means the market thinks the business will earn more on its assets than book value implies. P/B below 1.0x means the market thinks the business will destroy value or has lower-quality assets.

When to use P/B

P/B works best where book value approximates economic value:

• Banks and NBFCs - assets are loans, which are stated near fair value. P/B is the dominant multiple.
• Real estate developers - land bank is the bulk of book value. P/NAV (a variant) is used.
• Insurance - investment book + reserves. P/Embedded Value is the local variant.
• Holding companies / commodity producers - large tangible asset base.