Definition

The Price to Book (PB) Ratio is a financial metric used to compare a company's market value to its book value. It provides insight into how much investors are willing to pay for each dollar of a company's net assets.

Formula

PB Ratio = Market Price per Share / Book Value per Share

How to use the valuation method

Investors use the PB Ratio to assess whether a stock is undervalued or overvalued. A PB Ratio less than 1 may indicate that a stock is undervalued, while a ratio greater than 1 might suggest it is overvalued. However, this should be considered alongside other financial metrics and industry context.

Which industries it work best in

The PB Ratio works best in industries with significant tangible assets, such as financial services, manufacturing, and real estate. These industries have assets that are easier to value on the balance sheet.

Which industries it does not apply to and why

The PB Ratio is less applicable to industries with substantial intangible assets, like technology or pharmaceuticals, because these assets are often underrepresented on the balance sheet, leading to potentially misleading PB Ratios.

Summary

The Price to Book Ratio is a useful tool for evaluating a company's market value relative to its book value, particularly in asset-heavy industries. However, it should be used with caution in industries where intangible assets play a significant role, as it may not fully capture a company's true value.