P/B Ratio = Share Price ÷ Book Value per Share
The Short Version
P/B compares a company's market value to its 'book value' — the net worth of the company according to its balance sheet (assets minus liabilities). It's especially useful for evaluating banks, insurers, and asset-heavy businesses, where book value closely tracks tangible worth.
Explain It Like I'm 10
Imagine you're buying a used bike. The owner says it's worth $80 based on all its parts (frame, wheels, seat) added up — that's like the 'book value.' If someone offers to sell it to you for $80, you're paying exactly what the parts are worth (P/B = 1). If they ask for $160, you're paying double the parts' value because maybe it's a rare, great-condition bike (P/B = 2). If they'll sell for $40, you're getting it for half of what the parts are worth (P/B = 0.5) — maybe a bargain, or maybe something's wrong with it.
Step-by-Step Example
- 1 Company's book value (assets minus liabilities): $200,000,000.
- 2 Shares outstanding: 20,000,000.
- 3 Book value per share: $200,000,000 ÷ 20,000,000 = $10.
- 4 Stock is currently trading at $8 per share.
- 5 Divide: $8 ÷ $10 = 0.8 P/B ratio — the stock trades below its book value, which could mean it's undervalued, or that the market doubts those assets are really worth what's on paper.
Quick Recap
- ✓ A P/B below 1 can suggest a stock is undervalued relative to its assets — or that the market doubts the stated asset values.
- ✓ Less useful for asset-light businesses (like software companies) whose real value is in ideas, brands, or people rather than physical assets.