Price-to-Book Ratio Definition
The price-to-book ratio (PBR) takes favor by value investors for decades, and it widely uses by market analysts.
And traditionally, any value under 1.0 considers the good P/B value, indicating the potentially undervalued stock.
However, value investors often consider stocks with a P/B value under 3.0. It’s important to note that it is challenging to pinpoint the specific numeric value of the “good” P/B ratio.
When determining if the stock undervalues and, therefore, the suitable investment, ratio analysis can vary by industry, and the good P/B ratio for one industry the low rate for another.
What are the Basics of the P/B Ratio?
- The P/B ratio compares the company’s market capitalization, and market value, to its book value.
- And specifically, it compares the company’s stock price to its book value per share (BVPS).
- And the market capitalization company value its share price multiplied by the number of outstanding shares.
- The book values total assets – total liabilities, and it originates in the company’s balance sheet.
- Also, in other words, if the company liquidated all of its assets and paid off all its debt, the remaining value must in the company’s book value.
- It’s helpful to identify some general parameters and the range for the P/B value. Then, consider various other factors.
- And valuation measures that extra accurately interpret the P/B ratio and forecast its growth potential.
Calculating P B Ratio
- As stated earlier, the P/B ratio examines the company’s stock price to its BVPS. The rate calculates as follows:
- PB Ratio = Market Price per Share ÷ Book Value per Share (BVPS)
where:
BVPS = (Total Shareholder Equity – Preferred Equity) ÷ Total Outstanding Shares.