The P/B ratio compares a company's market value to its book value, measuring how much investors pay for each dollar of net assets.
The Price-to-Book ratio compares a company's market capitalization to its book value (total assets minus total liabilities). It shows whether investors are paying more or less than the accounting value of the company's net assets. This metric is particularly useful for asset-heavy businesses like banks, real estate, and manufacturing companies.
If a company has a market cap of $10 billion and book value of $5 billion, the P/B ratio is 10 / 5 = 2.0x. Investors are paying $2 for every $1 of book value.
A P/B ratio above 3-5x suggests investors expect the company to generate returns well above its book value, common in asset-light or high-growth businesses.
A P/B ratio below 1.0 indicates the stock trades below book value, potentially signaling undervaluation or concerns about asset quality.
Value investors often look for P/B ratios below 1.5x, while growth stocks commonly trade at P/B ratios of 5x or higher.
