The price to book ratio helps investors compare a company's market value with its book value. Learn the price to book ratio formula and how to use this metric to identify potentially undervalued stocks.
Updated November 04, 2026
The price to book ratio helps investors compare a company's market value with its book value. Learn the price to book ratio formula and how to use this metric to identify potentially undervalued stocks.
To use the price-to-book (P/B) ratio to find undervalued stocks, you compare a company’s share price with the value of its net assets and look for companies trading at a low P/B relative to their peers, their own history and their profitability. The key steps are:
Calculate the ratio: divide the share price by book value per share, or market capitalisation by total shareholders’ equity.
Compare within the sector: P/B levels vary widely by industry, so a ratio only means something next to similar companies.
Check profitability: a low P/B is only attractive if the company earns a reasonable return on equity (ROE).
Test asset quality: look at tangible book value and whether the assets on the balance sheet are worth what they are recorded at.
Rule out value traps: find out why the stock is cheap before treating a low ratio as an opportunity.
Confirm with other measures: combine P/B with earnings, cash flow and debt analysis rather than using it alone.
A P/B ratio below 1 means the market values a company at less than the accounting value of its net assets, which can signal undervaluation. It can also signal that investors expect those assets to lose value or the business to struggle. The ratio works best as a starting point for research, not a final answer.
This guide explains how the price-to-book ratio works:
how to calculate it, and what book value actually measures;
how to interpret different readings, and why the ratio suits some sectors far better than others;
how P/B connects to return on equity, and how to tell genuine value from a value trap;
how to build a practical screening process;
how analysing shares for investment differs from trading them through CFDs.
The recurring theme is that a low ratio raises a question rather than answering it. Skyriss believes that understanding what sits behind a valuation number is what separates analysis from guesswork. This article is educational and does not constitute investment advice; investing and trading carry risk, including the possible loss of the money you put in.
For those who want the overview immediately, here is how the ratio works in practice.
Book value is what would theoretically be left for shareholders if a company sold all its assets at their balance sheet values and paid off all its liabilities. The P/B ratio shows how much investors are paying for each unit of that net asset value. A ratio of 1 means the market price equals book value. A ratio of 2 means investors are paying twice book value. A ratio of 0.7 means they are paying 70% of it.
Low P/B stocks are a classic hunting ground for value investors, because buying assets below their accounting value can provide a margin of safety. The ratio is most useful for asset-heavy businesses such as banks, insurers, industrial companies and real estate firms. In these companies, the balance sheet captures much of what the business is worth. It is far less useful for technology, software and service companies, whose most valuable assets, such as intellectual property, brands and talent, often do not appear on the balance sheet at all.
The ratio’s real power comes from pairing it with profitability. A company with a low P/B and a solid, sustainable return on equity may be genuinely undervalued. A company with a low P/B and weak or falling returns is often cheap for good reason.
The key rule: use P/B to find candidates, then use deeper analysis to decide whether the discount reflects opportunity or risk. The rest of this guide explains each step in depth.
The price-to-book ratio is a valuation measure that compares a company’s market value with its book value, the net worth recorded on its balance sheet. It answers a simple question: how much are investors paying for the company’s net assets?
The ratio has been a cornerstone of value investing for decades. Early value investors favoured companies trading below their net asset value, reasoning that buying assets for less than their worth limited the downside even if the business performed poorly. Academic research on the value factor has also used book-to-market value, the inverse of P/B, as a way to classify stocks as cheap or expensive.
Book value, also called shareholders’ equity or net asset value, is calculated as a company’s total assets minus its total liabilities. It represents the accounting value of the owners’ stake in the business. If a company has $500 million in assets and $300 million in liabilities, its book value is $200 million.
Book value per share divides that figure by the number of shares outstanding. If preferred shares exist, their value is usually subtracted first, since preferred shareholders rank ahead of common shareholders. That way the figure reflects only what belongs to ordinary shareholders.
It is important to remember that book value is an accounting measure, not a market valuation. Many assets are recorded at their historical cost minus depreciation, which can be very different from what they would sell for today.
There are two equivalent ways to calculate P/B.
The per-share method divides the current share price by book value per share. The total value method divides the company’s market capitalisation by its total shareholders’ equity. Both give the same result.
Consider a company with $500 million in total assets, $300 million in total liabilities and 50 million shares outstanding:
Its book value is $200 million.
Its book value per share is $4.
If the shares trade at $3, the P/B ratio is 0.75.
In other words, investors are paying 75 cents for each dollar of net assets on the balance sheet.
Book value figures come from the company’s most recent balance sheet, published in quarterly and annual reports. Because the share price changes constantly and book value only updates when new financial statements are released, the ratio moves daily with the share price.
Price to tangible book value is a stricter version of the ratio. It removes intangible assets, such as goodwill from acquisitions, patents and brand values, from book value before calculating the ratio. Intangible assets can be hard to value and may have little worth if a company runs into trouble, so tangible book value gives a more conservative picture.
Using the same example, suppose $40 million of the company’s assets is goodwill:
Its tangible book value is $160 million.
Its tangible book value per share is $3.20.
At a $3 share price, its price to tangible book value is about 0.94.
The stock still trades below tangible book value, but the discount is much smaller than the headline P/B suggested. Analysts use this measure heavily for banks and financial companies, where tangible equity is closely linked to their ability to absorb losses.
There is no single good P/B ratio, because the right level depends on the industry, the company’s profitability and its growth prospects. Some general interpretations help as a starting point.
A P/B below 1 means the stock trades for less than its accounting net worth. This can indicate undervaluation, but it often reflects market concerns about the quality of the assets, weak profitability or the risk of future losses.
A P/B between 1 and 3 is common for many established companies, depending on sector and returns.
A high P/B, well above 3, usually means investors expect strong profitability and growth. This is typical of companies whose value comes largely from intangible assets or high returns on capital.
The most meaningful comparisons are relative. A stock’s P/B should be compared with companies in the same industry and with the company’s own historical range. A bank trading at 0.8 times book when its peers trade at 1.2 times, and when it has historically traded around 1.3 times, deserves a closer look. A software company trading at 4 times book may still be inexpensive compared with its sector.
A negative P/B occurs when a company’s total liabilities exceed its total assets, giving it negative book value. This can signal serious financial distress. It can also happen at healthy companies that have returned large amounts of capital to shareholders through buybacks or have accumulated losses from past restructuring. A negative ratio is not meaningful for valuation comparisons, and these companies need to be assessed using other measures.
P/B is most reliable where a company’s balance sheet captures much of its economic value.
Banks and financial companies are the classic use case. Their assets are mainly loans and securities, recorded at values that are often reasonably close to their worth, and regulators focus on their equity capital. P/B and price to tangible book value are among the most widely used valuation measures for banks.
Insurance companies, real estate firms, utilities and capital-intensive industrial businesses, such as manufacturing, shipping and materials, also lend themselves well to P/B analysis. Their value is closely tied to tangible assets like investment portfolios, property, plants and equipment.
Technology, software, pharmaceutical and service businesses often create value through assets that accounting rules do not record on the balance sheet at their true worth. Research and development spending is generally expensed rather than capitalised, so years of investment in software, patents or drug pipelines may not appear as assets. Brand strength, customer relationships and employee expertise are also largely invisible in book value unless acquired from another company.
As a result, these companies often trade at very high P/B ratios even when they are reasonably valued on earnings or cash flow. Using P/B to screen them would wrongly label most of them expensive. For these sectors, measures based on earnings, cash flow or revenue are usually more informative.
The link between P/B and return on equity is the single most important idea for using the ratio well. ROE measures how much profit a company generates for each unit of shareholders’ equity, calculated as net income divided by book value.
The relationship can be expressed simply: P/B equals ROE multiplied by the price-to-earnings ratio. A company with an ROE of 15% and a P/E of 10 will trade at a P/B of 1.5. This shows that P/B is not independent of profitability; it reflects both how profitable the company is and how much investors pay for those profits.
The intuition is straightforward. A company that earns a high return on its equity can justify a high P/B, because each unit of book value generates substantial profit. A company that earns a return below what investors require should trade below book value, because its assets are not producing enough to justify their accounting value.
Analysts sometimes estimate a justified P/B, the ratio a company deserves given its profitability, growth and the return investors require. A common simplified formula divides ROE minus the growth rate by the cost of equity minus the growth rate.
Suppose a company has an ROE of 12% and expected long-term growth of 4%, and investors require a 10% return:
The justified P/B is (12% minus 4%) divided by (10% minus 4%), or about 1.33.
If the same company earned an ROE of only 8%, its justified P/B would fall to about 0.67.
This shows why a low P/B is not automatically a bargain. A stock trading at 0.7 times book could be fairly valued if its returns are weak, and genuinely cheap only if its returns are strong enough to justify a higher multiple. The most promising candidates combine a low P/B with an ROE that is solid, stable and likely to persist.
A value trap is a stock that looks cheap on measures like P/B but stays cheap, or becomes cheaper, because its business is deteriorating. Avoiding value traps is the main challenge in using P/B effectively.
Several warning signs suggest a low P/B may be justified. Persistently low or declining ROE indicates the company’s assets are not generating adequate profits. Overstated assets, such as loans likely to default, outdated inventory, obsolete equipment or goodwill from overpriced acquisitions, may need to be written down, reducing book value. High debt increases the risk that losses wipe out shareholders’ equity. Industry decline, where demand for a company’s products is structurally shrinking, can mean its assets lose value over time regardless of management’s efforts.
Signs of genuine undervaluation look different. The company earns a stable or improving ROE, its assets appear conservatively valued, and its balance sheet is sound. The low valuation reflects a temporary problem, market pessimism toward the whole sector or simple neglect by investors. A catalyst, such as improving earnings, a restructuring or a recovery in the industry cycle, can also help close the gap between price and value.
The central question is always why the market is pricing the company below book value. If you cannot find a convincing answer, or the answer points to lasting damage, the discount is probably deserved.
P/B is a useful tool, but several limitations affect its reliability.
Accounting conventions shape book value. Many assets are recorded at historical cost minus depreciation, so property bought decades ago may sit on the balance sheet far below its current market value, while specialised equipment may be recorded above what it could be sold for. Different accounting standards and policies across countries and companies can also make comparisons less precise.
Share buybacks reduce book value, because the company uses its cash to repurchase shares. Companies that buy back large amounts of stock can show high or even negative book values despite being highly profitable, which makes their P/B look misleading.
Intangible assets create distortions in both directions. Internally developed intangibles are mostly missing from book value, while acquired intangibles such as goodwill can inflate it.
Finally, book value is backward-looking. It reflects past investments and accumulated profits, not the company’s future earning power, which is ultimately what drives long-term share prices.
A practical P/B screening process combines the ratio with other checks to narrow a broad universe down to genuine candidates.
Choose suitable sectors: focus on asset-heavy industries where P/B is meaningful, such as banks, insurers, industrials, materials, energy and real estate.
Screen for low relative P/B: identify companies trading below their sector average and their own historical P/B range, rather than applying a single universal cut-off.
Filter for profitability: require a reasonable and stable ROE over several years, which removes many companies that are cheap because their assets earn poor returns.
Check balance sheet strength: review debt levels, using measures such as debt-to-equity, and for financial companies their capital ratios, to avoid businesses at risk of losses wiping out equity.
Examine asset quality: compare P/B with price to tangible book value, look at the composition of assets and watch for large goodwill balances or signs of write-downs.
Confirm with other valuation measures: cross-check the P/B signal with price-to-earnings, price-to-cash-flow and dividend yield to see whether the stock looks cheap on several measures.
Investigate the reason for the discount: read recent results, management commentary and industry developments to understand why the market is pessimistic, and whether that pessimism is likely to fade.
Stocks that pass all these steps are far more likely to be genuinely undervalued than those selected on a low P/B alone.
No single ratio captures a company’s full value. P/B focuses on assets, the P/E ratio on earnings, price-to-cash-flow on cash generation and dividend yield on income. A stock that looks cheap on P/B but expensive on earnings may have assets that are not producing profits. A stock that looks cheap on both, with healthy cash flow and manageable debt, presents a much stronger case. Using several measures together reduces the risk of being misled by the quirks of any one.
Using P/B to find undervalued stocks is usually part of a long-term investment approach. Investors buy shares they believe are worth more than their current price and hold them while the market recognises that value, a process that can take months or years. Owning shares brings rights such as dividends and voting, and the investor benefits directly if the company’s value is realised.
Trading contracts for difference works differently. A CFD lets a trader speculate on the price movement of a share or index without owning the underlying asset. Traders can go long or short, usually with leverage, which magnifies both gains and losses and makes CFD trading a high-risk activity suited to shorter-term strategies. Valuation measures like P/B can still provide useful context for traders, for example when a sector re-rates after an earnings season or a change in interest rates. Shorter-term price movements, though, are often driven by sentiment, news and momentum rather than by the slow process of a valuation gap closing.
Skyriss is a regulated multi-asset broker offering CFD trading on shares, global indices, forex, commodities and crypto. For investors seeking to benefit from long-term undervaluation, owning shares directly is usually the more natural route. For traders who want to act on shorter-term price moves in either direction, CFDs offer a different kind of exposure. Knowing which approach fits your goals matters more than the instrument itself.
The price-to-book ratio compares a company’s share price with the value of its net assets per share, as recorded on its balance sheet. It shows how much investors are paying for each unit of the company’s net worth.
No. A P/B below 1 means the stock trades for less than its accounting net worth, which can indicate undervaluation. It often reflects concerns about asset quality, weak profitability or future losses. It should prompt further research, not an automatic purchase.
Banks are commonly valued using P/B and price to tangible book value. A bank’s appropriate ratio depends largely on its return on equity relative to its cost of capital. Banks earning strong, sustainable returns typically trade above book value, while those with weak returns often trade below it.
Much of a technology company’s value comes from intangible assets such as software, intellectual property, brands and talent, which are often not recorded on the balance sheet. This keeps book value low relative to market value, producing high P/B ratios even for reasonably valued companies.
Book value is the accounting value of a company’s net assets, calculated as total assets minus total liabilities. Market value is what investors are willing to pay for the company, calculated as share price multiplied by shares outstanding. The P/B ratio compares the two.
P/B equals return on equity multiplied by the price-to-earnings ratio. Companies that earn high returns on their equity can justify higher P/B ratios, while companies with returns below what investors require tend to trade below book value.
A value trap is a stock that looks cheap on valuation measures such as P/B but remains cheap or falls further, because its business is deteriorating. Common causes include declining profitability, overstated assets, high debt and structural decline in its industry.
No. P/B works best as a screening tool combined with return on equity, earnings, cash flow, debt levels and an understanding of why a stock is trading at a discount. Using several measures together gives a more reliable picture of value.
The price-to-book ratio remains one of the most useful starting points for finding undervalued stocks, particularly in asset-heavy sectors like banking, insurance and industrials. It is simple to calculate, easy to compare and grounded in something tangible: the net assets a company owns.
Its value lies in how it is used. A low P/B tells you the market is pricing a company below the accounting value of its assets, but not why. The answer depends on whether those assets are worth what the balance sheet says, whether they generate adequate returns, and whether the business faces a temporary setback or lasting decline. Investors who pair P/B with profitability, balance sheet strength and a clear explanation for the discount are far better placed to separate genuine opportunities from value traps. Whether you are analysing companies for the long term or following share and index moves more actively, explore what Skyriss offers at skyriss.com/get-started.
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