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What Is the Price-to-Book (P/B) Ratio? Formula and Example
The price-to-book ratio compares a stock's price with its book value per share. See the formula, an example and when P/B works best, such as for banks.
Price-to-book ratio in 60 seconds
- P/B compares what the market pays for a share with the accounting value of the company's net assets per share.
- Formula: share price ÷ book value per share.
- It works best for banks, NBFCs and asset-heavy companies, and poorly for asset-light businesses such as software.
Educational summary — not investment advice.
Book value is what would be left for shareholders if a company sold all its assets and paid off all its liabilities, according to its balance sheet. The price-to-book ratio compares the share price with that book value per share.
A P/B of 1 means the market values the company at exactly its net assets. Above 1, investors are paying a premium for earning power and growth; below 1, the market values it at less than its accounting net worth.
How is Price-to-book ratio calculated?
| Measure | Formula |
|---|---|
| P/B ratio | Share price ÷ Book value per share |
| Book value per share | Shareholders' equity ÷ Number of shares |
| Same thing, whole company | Market capitalisation ÷ Shareholders' equity |
Shareholders' equity is total assets minus total liabilities, taken from the balance sheet. Some analysts use 'tangible' book value that excludes goodwill and other intangibles.
Price-to-book ratio example with numbers
| Item | Value |
|---|---|
| Shareholders' equity | ₹2,000 crore |
| Shares outstanding | 10 crore |
| Book value per share | ₹200 |
| Share price | ₹300 |
| P/B ratio | 1.5x |
Book value works out to ₹200 per share. At ₹300, the stock trades at 1.5x book — investors are paying a 50% premium over net assets, which is usually justified only if the bank keeps earning a healthy return on equity.
Illustrative figures. The market is paying a premium over the accounting value of the net assets.
P/B and ROE go together
A company that earns a high return on equity deserves a higher P/B; one that earns a poor return may deserve a P/B below 1 even if it looks 'cheap'. Comparing P/B with ROE is far more informative than reading either alone.
When P/B is useful — and when it is not
- Useful: banks, NBFCs, insurers and asset-heavy businesses whose value really sits on the balance sheet.
- Less useful: IT services, consumer brands and other asset-light firms whose value is in brands, people and software that accounting largely ignores.
- Beware old assets carried at historical cost — land and property can be worth far more than book value.
- A P/B below 1 can flag a bargain, or a company that destroys value on its assets.
What book value is, and what it is not
Book value is an accounting figure: a company's assets minus everything it owes, as recorded on its balance sheet. It is what would notionally be left for shareholders if the assets were sold at their recorded values and every liability were paid. Divide it by the number of shares and you get book value per share.
The word "notionally" matters. Assets are recorded at cost less depreciation, not at what they would fetch today. Land bought decades ago may be worth many times its recorded value; a brand or a customer base, which may be the company's most valuable asset, is often not on the balance sheet at all. Price-to-book therefore compares the market's valuation with an accounting benchmark, and the interesting part is the gap between them.
Calculating price-to-book
- Shareholders' equity from the balance sheet: share capital plus reserves and surplus. Use the consolidated figure and exclude minority interest.
- Number of shares outstanding from the shareholding pattern or the results.
- Book value per share = equity ÷ shares.
- P/B = market price ÷ book value per share.
Suppose equity is ₹5,000 crore and there are 50 crore shares. Book value per share is ₹100. If the share trades at ₹180, P/B is 1.8: investors pay ₹1.80 for every ₹1 of accounting net worth. For companies with big acquisitions, use tangible book value, which removes goodwill and intangibles, since those may not survive a downturn.
The link between P/B and return on equity
The single most useful thing to know about P/B is that it is tied to how profitably a company uses its equity. A company that earns a high return on equity deserves to trade above book value; one that earns less than its cost of equity deserves to trade below it. A simple model captures this: justified P/B ≈ (ROE − g) ÷ (cost of equity − g), where g is the long-run growth rate.
| Return on equity | Justified P/B |
|---|---|
| 10% | (0.10 − 0.08) ÷ (0.12 − 0.08) = 0.5 |
| 12% | (0.12 − 0.08) ÷ (0.12 − 0.08) = 1.0 |
| 16% | (0.16 − 0.08) ÷ (0.12 − 0.08) = 2.0 |
| 20% | (0.20 − 0.08) ÷ (0.12 − 0.08) = 3.0 |
This is a simplification, but it explains a lot: banks with a consistently high ROE trade at a premium to book; struggling companies trade below it. A stock at 0.8 times book with an ROE below its cost of equity is not necessarily cheap — the market may be pricing in that the assets earn too little.
Where P/B works — and where it does not
| Type of company | Usefulness of P/B |
|---|---|
| Banks, NBFCs, insurers | The standard yardstick. Balance sheets are mostly financial assets marked close to fair value. |
| Asset-heavy businesses (shipping, metals, power) | Useful, especially through cycles when earnings swing but assets remain. |
| Real estate | Use with care; land and inventory may be far from market value. |
| IT services, consumer brands, pharma with strong IP | Poor. The valuable assets — people, brands, patents — are largely absent from the balance sheet. |
| Companies with big goodwill | Use tangible book value instead. |
Reading P/B for Indian banks
P/B is the everyday valuation tool for banks listed on NSE and BSE. Private and public sector banks often trade at very different multiples of book, and the reasons are worth understanding: the return on equity they earn, how clean their loan books are (gross and net NPAs), how cheaply they raise deposits, and how much capital they hold relative to their risks.
A bank trading at a P/B of 3 is not necessarily expensive; if its ROE is 17% and stable, the model above says a high multiple is fair. A bank at 0.7 times book is not necessarily cheap; if its bad loans are rising and its ROE is low, the discount may be deserved. Always read P/B together with ROE and asset quality.
Common mistakes
- Treating a P/B below 1 as an automatic bargain.
- Comparing the P/B of an asset-light company with an asset-heavy one.
- Ignoring that book value can shrink through losses or write-offs, which raises P/B without the price moving.
- Using standalone book value for a group company.
- Forgetting that recorded land and property values may be very old.
Test yourself
- Question 1. Equity ₹3,000 crore, 30 crore shares, price ₹150. P/B? Answer: book value per share is ₹100, so P/B = 1.5.
- Question 2. A stock trades at ₹200 with book value per share of ₹250. P/B? Answer: 0.8 — a discount to book.
- Question 3. With ROE 15%, growth 7% and cost of equity 11%, what is the justified P/B? Answer: (0.15 − 0.07) ÷ (0.11 − 0.07) = 0.08 ÷ 0.04 = 2.0.
Pair P/B with return on equity for banks, and with EV/EBITDA or P/E for businesses whose value lies in their earnings rather than their assets.
On NSE and BSE: what to keep in mind
- P/B is the standard yardstick for Indian banks, NBFCs and insurers. Private banks have tended to trade at a premium to PSU banks, reflecting differences in ROE and asset quality.
- Use consolidated book value, and look at tangible book value if the company carries large goodwill from acquisitions.
- Land and property carried at historical cost can make P/B look expensive for real estate and old industrial companies.
Price-to-book ratio: frequently asked questions
What is a good P/B ratio?
It depends on the sector and the company's ROE. Quality banks often trade well above 1, while struggling asset-heavy firms can trade below it. Compare with peers and history.
Can P/B be below 1?
Yes. It means the market values the company at less than its accounting net worth, which might signal undervaluation — or expected losses and weak returns.
Is P/B better than P/E?
Neither is better. Use P/E for profitable, earnings-driven businesses and P/B for balance-sheet-driven ones such as banks.
Disclaimer: this article is for education only. The figures in the worked example are illustrative and do not describe any real company listed on NSE or BSE. It is not investment advice, and investingg.in is not a SEBI-registered advisor.
The bottom line
Price-to-book tells you how much you pay for a company's net assets. It shines for banks and asset-heavy businesses — and should always be read alongside ROE.
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Disclaimer: This analysis is for educational purposes only and should not be considered investment or trading advice. Please consult your financial advisor before making investment decisions.