Stock Market · Fundamental Analysis

P/B ratio

P/B (Price-to-Book) ratio compares the market price of a stock to its book value (net assets per share). It answers: how much is the market paying relative to what the company's assets are worth on paper?

The formula

P/B = Market Price per Share ÷ Book Value per Share

Book Value per Share = (Total Assets − Total Liabilities) ÷ Shares outstanding

> A P/B of 1 means you're buying the company at exactly the value of its net assets. Below 1 means you're buying for less than book value. Above 1 means you're paying a premium for intangibles, brand, or growth expectations.

When P/B is useful

P/B works best for asset-heavy industries:

• Banks: P/B is THE primary valuation metric. A bank trading at P/B of 3.5 vs its peers at 1.5 needs justification.
• Real estate companies: assets (property) dominate the balance sheet
• Manufacturing: heavy machinery and plant

P/B < 1Often a value opportunity in banks/financials if not due to bad assets

When P/B is misleading

For asset-light businesses (IT companies, consumer brands), book value is irrelevant. An asset-light IT services firm's true value is its people and brand, neither appears on the balance sheet at full value.

A P/B of 8 for such an asset-light software business doesn't mean it's expensive. It means the business generates returns far above its asset base.

ROE connection

P/B and ROE are linked. High ROE companies deserve high P/B. The formula: Justified P/B = ROE ÷ Cost of equity.

A company with 25% ROE can justify a higher P/B than one with 8% ROE. This is why top-tier private banks have historically traded at 4–5× book despite looking 'expensive' on P/B. Their ROE justified it.

Takeaway. P/B = price ÷ book value. Best for asset-heavy businesses (banks, manufacturing). For asset-light companies (IT, FMCG), P/B is less relevant. High ROE justifies high P/B.