How does the share price compare with the owners' money on the company's books?
Price-to-Book Ratio (P/B)
Lesson 10 of 11 · Price
P/B is the share price divided by the book value per share: the owners' money on the balance sheet, per share.
In everyday life
A shop's owners have ₹10 lakh of their money in it (stock, fittings, cash). If someone pays ₹30 lakh for the shop, they're paying 3 times its book value, for its customers and name.
How it's worked out
Example: Sunrise Tea, a made-up company that sells packaged tea across India.
In words: You pay ₹3 for every ₹1 of the owners' money on the books.
Try it yourself
Move the sliders and watch the answer, the picture and the verdict change together.
You pay ₹3 for every ₹1 of the owners' money on the books.
Rough guide
- Below book
- Middle
- High
What's a good number?
- Below book
Up to 1x
- Middle
1x to 3x
- High
Above 3x
P/B matters most for banks, whose assets are mostly money. For a software firm, the real value (its people and clients) isn't on the books, so P/B always looks high.
Key number in the sector guides for Banks.
How to read it
Good signs
- For banks: a P/B that's reasonable next to the bank's ROE (a bank earning 15% ROE usually deserves a higher P/B than one earning 8%).
Watch out for
- Below 1x can mean the market doubts the book value, for example a bank's loans may be worse than reported.
Read it with
For learning only. Example companies are made up, and the rough guides are rules of thumb, not targets. Nothing here is advice to buy or sell any stock.