Price-to-Book Ratio (P/B)
P/B compares a company's market capitalization to its book value, indicating how much investors pay for each dollar of net assets.
Concept map
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Definition
P/B compares a company's market capitalization to its book value, indicating how much investors pay for each dollar of net assets.
Use case
Used in equity analysis workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Price-to-Book Ratio (P/B)
Book value = Total Assets - Total Liabilities. P/B is favored for valuing financial institutions and asset-heavy industries where book value approximates liquidation value. A P/B below 1 suggests the market values the company below its accounting net worth — possibly a value opportunity or distress signal.
Example: A bank has $50B in book value (assets minus liabilities) and 1B shares outstanding. Book value per share = $50. With shares trading at $75, P/B = 1.5x, indicating the market values the franchise above liquidation value.
Rank-ready answer
Definition, example, and interview framing
P/B compares a company's market capitalization to its book value, indicating how much investors pay for each dollar of net assets.
A bank has $50B in book value (assets minus liabilities) and 1B shares outstanding. Book value per share = $50. With shares trading at $75, P/B = 1.5x, indicating the market values the franchise above liquidation value.
In an interview, define Price-to-Book Ratio (P/B), explain where it appears in a real finance workflow, then name one assumption or limitation that a reviewer should check.
FAQ
Frequently Asked Questions
What is Price-to-Book Ratio (P/B)?
P/B compares a company's market capitalization to its book value, indicating how much investors pay for each dollar of net assets.
How is Price-to-Book Ratio (P/B) used in finance?
Book value = Total Assets - Total Liabilities. P/B is favored for valuing financial institutions and asset-heavy industries where book value approximates liquidation value. A P/B below 1 suggests the market values the company below its accounting net worth — possibly a value opportunity or distress signal.
Can you give an example of Price-to-Book Ratio (P/B)?
A bank has $50B in book value (assets minus liabilities) and 1B shares outstanding. Book value per share = $50. With shares trading at $75, P/B = 1.5x, indicating the market values the franchise above liquidation value.