The “P/B” Ratio
The P/B (Price to book) is the ratio of price to book value per share.
Book value is the value of an asset according to its balance sheet account - in other words, the value of the company’s assets minus its liabilities.
What will be the company’s value if it liquidated its assets and paid back all it’s liabilities? That’s the book value.
Then to use P/B Ratio
- This ratio is relied on by “Value Investors” looking to find good companies relative to their current price per share.
- It can also be used during periods of negative earnings. Even if the company is not profitable in some periods, it can still have a positive book value.
Pros and Cons
Pros
- Stable Metric. Given the relative stability of the base metric (book value), the P/B ratio is relatively stable and doesn’t fluctuate as much as other metrics.
Cons
- Accounting differences can make it harder to compute
- It becomes less useful when companies classify items on their balance sheet differently due to different interpretations of accounting rules.
- Harder to compare companies with little tangible assets (tech firms, service providers) against those with lots of inventory or property (retailers, automobile).
What is a good P/B Ratio?
- The range of 1.0-3.0 is generally good.
- Less than 1.0 is excellent.