What is Price-to-book ratio? How Useful is this ratio?

• Measures the value that the stock market places on a company relative to its book value.
• Also known as price-equity ratio

• Frequently used by investors to find undervalued companies

Simple illustration:

Interpretation:

• Generally, a high P/B indicate that a company is overvalued and a low P/B ratio an undervalued company.

Salient points to note:

• This business ratio is relatively simplistic
• High P/B might not mean overvalue as the public might view the company’s future are good and earning potential is high

• Also, in bull market, normally high P/B but during bear markets P/B be similar re: nearer to 1
• Also be aware that some consumer and service orientated companies have negative P/B ratio because they have relatively more liabilities than assets
• This ratio cannot be used singly and should analyzed together with other financial measurements like return on equity, etc and also cash flow and volatility of earnings must be considered too.