What is P/B ratio?
P/B koeffitsienti
In short
Market cap ÷ shareholders' equity (book value). Useful where assets are the main wealth; less meaningful for brand and software companies.
Also known as: price to book, book value
P/B (price-to-book) compares a company's market value with the equity on its balance sheet (book value).
P/B = Market capitalisation ÷ Shareholders' equity
or per share: Price ÷ Book value per share
A P/B of 1 means the market values the company at roughly its book value. Below 1, the market doubts even the recorded value of the assets; above 1, the market is pricing in value the balance sheet does not show (brand, growth, technology).
Where it is useful
In industries where assets are the main source of wealth: banks, insurers, real estate, some industrials. There book value is relatively close to the business's real worth.
Where it means little
In software, brand and service companies the main value — people, code and the customer base — barely appears on the balance sheet. At companies that have done heavy buybacks, equity can be tiny or negative, making P/B meaningless.
A key link: P/B and ROE
A company earning a high return on its equity (ROE) deserves a higher P/B. If you see a low P/B together with a low ROE, it may not be cheapness but a sign that capital is working poorly.
Example
Two hypothetical companies:
Bank: market cap $12 billion, equity $10 billion → P/B = 12 ÷ 10 = 1.2. Per share: 400 million shares, book value $10B ÷ 400M = $25, price $12B ÷ 400M = $30 → $30 ÷ $25 = 1.2.
Software company: market cap $50 billion, equity $5 billion → P/B = 10.
The second is not necessarily "expensive" — its value sits mostly in assets that are not on the balance sheet. Comparing P/B among banks is much more meaningful: a bank with a 12% ROE usually trades at a higher P/B than one with a 6% ROE.
Mistakes and tips
Don't compare P/B across industries — only among similar business models.
If P/B is below 1, look for the reason: the assets (a loan book, for example) may really be worth less than recorded.
If goodwill is large, also calculate it on "tangible book" (book value excluding intangibles).
Frequently asked questions
- Is a stock with P/B below 1 cheap?
- Not always. The market may doubt the quality of the assets or the company's ability to earn enough on its capital; this is common in value-trap situations.
- What is book value?
- It is the accounting equity left for shareholders after all liabilities are subtracted from assets. Divide it by the share count to get book value per share.
Learn it in the Academy
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