The price-to-book ratio (P/B ratio, or market-to-book ratio) measures a company’s market value relative to its book value.
There are two ways to calculate the price-to-book ratio:
Price-to-book Ratio = (Stock Price) / (Book Value Per Share)
Price-to-book Ratio= (Market Capitalization) / (Book Value)
The “book value” most frequently used to calculate the price-to-book ratio is the tangible book value. The tangible book value is theoretically the amount that common shareholders would receive if all the company’s hard assets were sold for their book values and the company’s debts were paid. The tangible book value is calculated by subtracting preferred equity and intangible assets from the company’s stockholders’ equity.
The price-to-book ratio is used to identify investments that are a bargain (value investors look for companies with a price-to-book ratio that is less than one).
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