Price-to-book asks a simple question: how much are you paying for each dollar of a company's net assets? It's a classic value-investing yardstick — powerful for some businesses, almost useless for others.
What is book value?
Book value (also called shareholders' equity) is everything a company owns minus everything it owes, as recorded on the balance sheet. Divide it by the number of shares and you get book value per share — in theory, what each share would be worth if the company were wound up at its accounting values.
Reading the ratio
| P/B | Rough interpretation |
|---|---|
| Below 1 | Priced below the accounting value of its assets — cheap, or distressed. |
| Around 1–3 | Typical for many established, asset-heavy businesses. |
| Well above 3 | The market values something the balance sheet doesn't capture. |
Where P/B misleads
Book value counts physical, recorded assets well but ignores intangibles like brands, software and know-how. A software or consumer-brand company can be hugely valuable with almost no book value, making its P/B look absurdly high for no bad reason. P/B works best for banks, insurers and asset-heavy industrials — not for asset-light businesses.
Example: a bank trading at 0.8× book may genuinely be cheap, while a software firm at 12× book isn't necessarily expensive — its real assets simply aren't on the balance sheet.
The takeaway
Use P/B as one lens, not a verdict. Always pair it with profitability: a low P/B is only a bargain if the assets actually earn a decent return.
