Price-to-Book (P/B) Ratio Explained: Asset-Based Valuation

#What Is Price-to-Book?

The price-to-book ratio divides a company's stock price by its book value per share. Book value = total assets minus total liabilities.

P/B Ratio = Market Price Per Share ÷ Book Value Per Share

If a stock trades at $50 and book value per share is $25, P/B = 2.0. The market values the company at twice its accounting worth.

#What Book Value Actually Measures

Book value is the theoretical amount shareholders would receive if the company liquidated all assets and paid all debts. It includes:

• Cash and investments
• Property, plant, and equipment (at depreciated cost)
• Inventory
• Minus: all liabilities

What it misses:

• Brand value
• Intellectual property
• Customer relationships
• Human capital
• Software and R&D

This is why P/B works best for asset-heavy businesses where tangible assets drive value.

#P/B Benchmarks by Industry

#When P/B Is Useful vs. Misleading

Useful for: - Banks and financial institutions - Companies with lots of tangible assets - Comparing within the same industry - Identifying deep value (P/B below 1.0)

Misleading for: - Tech companies (intangible-heavy) - Companies with old depreciated assets - Firms with significant goodwill from acquisitions - Any business where brand/IP drives value

#P/B and Factor Investing

P/B was one of the original factors in the Fama-French three-factor model (1992). Their research showed that low P/B (high book-to-market) stocks historically outperformed.

However, Arnott et al. (2021) found that adjusting book value for intangible assets significantly improves the value factor's performance. Traditional P/B has lost some of its edge as the economy shifted toward intangible-heavy businesses.

In our model, we use P/B alongside other value metrics (earnings yield, cash flow yield) to avoid over-relying on any single measure.

Read our research on intangible-adjusted value →