Price to Book Ratio

Definition

Price to book is a company's market cap valuation compared to its book value.

Calculation

Price to Book Ratio = Market Price per Share/Book Value per Share

Let's say that Company A has a market price per share of $75 and the book value is $25

$75/$25 = 3 P/B Ratio

This tells investors that Company A is currently trading 3 times its book value.

Why is this important?

Warren Buffett is famous for the Price to Book ratio when choosing investments. Price to book is widely used by investors, the P/B ratio shows how aggressive a stock is being priced.

Value investors tend to favor the price to book ratio in order to identify companies that are undervalued. Companies with a price to book value less than 1.0 are often considered undervalued by value investors.  Equities that have a high P/B may indicate that the stock is fully priced and may experience a price correction.

Financial Glossary Reference

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