Price to Book Ratio – P/B (price-equity ratio)
A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.
According to Benjamin Graham, investors should pay no more than 1.5 times a stock’s book value. If a company’s book value per share is $20, then the maximum an investor should pay is $30 per share.
- Companies trading below one and a half times book value are deemed to be value stocks.
- Companies trading higher than one and a half times book value should be considered expensive.
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company.
The Book Value of a business is calculated from the balance sheet, and it is the difference between a company’s total assets and total liabilities. So, if a company has $10 in assets and $5 in liabilities, the book value or net value of the business is $5.
The Market Value is the value of a company according to the stock market and calculated by multiplying a company’s shares outstanding by its current market price. If the business has 10 shares outstanding and each share trades for $2, then the company’s market value is $20.