The P/B ratio

In simple terms

Book value is shareholders' equity: what the balance sheet says belongs to shareholders after all liabilities are subtracted from all assets. The price-to-book ratio (P/B) compares the market's price for the company with that accounting value.

A P/B of 3 means investors pay ₹3 for each ₹1 of book equity. A P/B below 1 means the company is valued at less than its book equity.

The link between P/B, ROE and P/E

P/B, P/E and return on equity are connected:

This follows from the definitions: price ÷ book = (price ÷ earnings) × (earnings ÷ book). It means a high P/B is not necessarily expensive. A company earning 25% on its equity will usually trade at a much higher P/B than one earning 8%, because each rupee of its equity produces more profit.

Where P/B works best

Banks, lenders and insurers. Their assets are mostly loans and investments, recorded at values close to what they are worth, provided bad loans are properly recognised. Their profits depend on how much equity capital they have. So P/B, read together with ROE and asset quality, is a central valuation tool, as the analysing banks lesson explains.

Asset-heavy businesses, such as some manufacturers, real estate and holding companies, where the balance sheet captures much of what the business owns, though book values can be far from current market values.

Where P/B misleads

Asset-light businesses. Software companies, consumer brands and service firms create value from brands, know-how, customer relationships and people, most of which never appear on the balance sheet. Their book values are small, so their P/B ratios look very high and say little about value.

Companies with large buybacks or write-offs. Buybacks reduce equity, and so do write-offs of past losses. Both raise P/B without changing the business.

Old assets at historical cost. Land bought decades ago may be on the books at a fraction of its value; a plant that is obsolete may be on the books at far more than it is worth.

Below book is not always cheap

A share below book value can be a value trap:

• Low ROE: if the company earns less on its equity than shareholders require, the market rationally values that equity below book.
• Overstated assets: bad loans not yet recognised, obsolete inventory, or plants worth less than their book value mean the true book value is lower than reported.
• Value leaking away: related-party dealings or poor capital allocation can mean minority shareholders never benefit from the assets, as the governance lessons explain.

Below-book shares deserve a look, but the question is always why the market values them so.

Why it matters

P/B anchors valuation to the balance sheet, which is useful when profits are volatile or temporarily depressed, and essential for financial companies. Its link to ROE also shows a key idea in valuation: what matters is not how much equity a company has, but how much it earns on that equity.

Limitations

Book value is an accounting number built on historical costs, estimates and write-offs. It misses intangible assets that do not appear on the balance sheet and can overstate assets whose value has fallen. P/B comparisons across industries are rarely meaningful. Use it alongside ROE and an understanding of the assets.

Common mistakes

• Treating P/B below 1 as a bargain without checking ROE and asset quality.
• Using P/B for asset-light businesses.
• Ignoring the effect of buybacks and write-offs on book value.
• Comparing P/B across industries.

Try it yourself

1. Choose a listed bank and a listed consumer goods company.
2. From their annual reports, find shareholders' equity and the number of shares, and calculate book value per share.
3. Calculate P/B from the current share price, and find each company's ROE.
4. Check that P/B is roughly ROE × P/E for each, and explain the difference between the two P/B ratios.