Price-to-Book Ratio (P/B)

Book value is a company's total assets minus its total liabilities, the shareholders' equity on the balance sheet. Dividing it by the number of shares gives book value per share. The P/B ratio then shows how much investors are paying for each unit of those accounting net assets.

For example, if a company's share price is 30 and its book value per share is 20, its P/B ratio is 1.5. Investors are paying 1.5 times the accounting value of the company's net assets.

A P/B ratio below 1 can suggest that shares are trading for less than the value of the company's net assets, which may indicate undervaluation or that investors expect the assets to lose value or the company to make losses. A high P/B ratio often reflects expectations of strong future profits or valuable assets not shown on the balance sheet, such as brands.

P/B is especially useful for valuing banks and insurers, whose assets are mainly financial and recorded close to market value. It is less useful for companies whose main value lies in intangible assets that do not appear on the balance sheet, such as many technology firms.