Understanding Book Value and the P/B Ratio
Book value is a company’s net worth on paper; the P/B ratio compares it to the market price. Here’s how to use them.
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Book value is a company’s net worth according to its balance sheet — total assets minus total liabilities. The P/B ratio (price-to-book) compares the market price to that book value.
Book value per share
Divide book value by the number of shares and you get book value per share — what each share would theoretically be worth if the company were wound up at balance-sheet values. It’s an accounting figure, so it reflects historical costs, not market reality.
The P/B ratio
P/B = share price ÷ book value per share. A P/B of 3 means the market values the company at three times its net worth on paper.
- Low P/B can signal value — or a troubled business whose assets are impaired.
- High P/B can mean overvaluation — or a high-quality company whose real worth (brands, people, future profits) far exceeds its balance-sheet assets.
Where P/B is most useful
P/B works best for asset-heavy, financial businesses — banks, NBFCs, insurers — where the balance sheet closely reflects value. It’s less meaningful for asset-light businesses (software, services), whose value lies in intangibles not fully on the books.
Use with ROE
P/B is most insightful paired with ROE: a company earning high returns on equity can justify a higher P/B, while a low-ROE firm on a high P/B looks stretched. Education only, not a recommendation.
