P/B Ratio: Price vs Book Value
While P/E looks at earnings, P/B looks at assets. It's especially useful for certain types of companies.
The Formula
P/B Ratio = Stock Price ÷ Book Value Per Share
Book Value = Total Assets - Total Liabilities
It's essentially what shareholders would get if the company sold everything and paid off all debts.
Selling Your House
Imagine your house:
- Value of house: $400,000
- Mortgage owed: $250,000
- Book Value (Equity): $150,000
If you sold the house and paid off the mortgage, you'd have $150,000.
For a company, book value is similar—what's left for shareholders after paying all debts.
What P/B Tells You
| P/B Level | Interpretation |
|---|---|
| Below 1.0 | Trading below book value (potentially very cheap or troubled) |
| 1.0 - 2.0 | Cheap to fair for asset-heavy companies |
| 2.0 - 3.0 | Fair for most companies |
| 3.0 - 5.0 | Premium valuation |
| Above 5.0 | High premium (justified by high returns on equity) |
P/B Below 1: A Special Case
When P/B < 1, the market is saying the company is worth less than its net assets.
This could mean:
- 🟢 The stock is genuinely undervalued (opportunity!)
- 🔴 The assets are overstated on the books
- 🔴 The company is destroying value (losing money)
- 🔴 The industry is in decline
Key question: Why is the market valuing it below book value?
Key Takeaways
- P/B = Price ÷ Book Value Per Share
- Book Value = Assets - Liabilities
- P/B < 1 means trading below net asset value
- Most useful for banks, insurance, and asset-heavy industries
When P/B Works Best
Great for:
- Banks — Assets (loans) are the business
- Insurance companies — Investment portfolios are key
- REITs — Real estate assets are tangible
- Industrial companies — Factories, equipment matter
Less useful for:
- Tech companies — Value is in intangibles (software, brand)
- Service companies — Few physical assets
- High-growth companies — Future earnings matter more than current assets
Why Tech Has High P/B
Apple's P/B is around 40-50. Does that mean it's overvalued?
Not necessarily. Apple's real value is in:
- Brand recognition
- Customer loyalty
- Ecosystem lock-in
- R&D and patents
These don't show up fully on the balance sheet. For tech, P/E and P/S are often more relevant.
P/B by Sector
| Sector | Typical P/B | Why |
|---|---|---|
| Banks | 0.8 - 1.5 | Asset-based business |
| Insurance | 1.0 - 2.0 | Investment portfolios |
| Industrials | 2.0 - 4.0 | Physical assets + earnings power |
| Technology | 5.0 - 20.0+ | Intangible value dominates |
| Consumer Brands | 3.0 - 10.0 | Brand value not on books |
Combining P/B with ROE
Here's a powerful insight:
P/B should relate to Return on Equity (ROE)
- High ROE (company earns a lot on its equity) → Deserves higher P/B
- Low ROE (company earns little on its equity) → Deserves lower P/B
Example:
- Company A: 20% ROE, P/B of 3.0 → Fair
- Company B: 5% ROE, P/B of 3.0 → Overvalued
A company that earns 20% on its book value is worth more than one earning 5%.
P/B Limitations
1. Book Value Can Be Misleading
- Assets might be worth more or less than stated
- Intangibles (brand, patents) often understated
- Goodwill from acquisitions can inflate book value
2. Doesn't Reflect Earning Power
A company with low book value but high earnings might be a great investment.
3. Industry-Specific
Comparing P/B across sectors is meaningless.
P/B Traps
- Buying banks just because P/B < 1 (might have bad loans)
- Using P/B for tech companies (misleading)
- Ignoring why book value is high (could be goodwill from bad acquisitions)
- Not considering ROE alongside P/B
Next up: P/S Ratio—valuing companies by their sales.