A company’s Price-to-Book (P/B) Ratio measures its current market value versus its book value.
The P/B ratio is calculated as follows:
P/B Ratio = Total Market Value of the Company / Total Book Value of the Company
The total Market Value of a company is its market capitalization (“market cap”) at any given time. For a publicly traded entity, the market cap is calculated by multiplying the total number of outstanding shares by the current trading price. For a non-publicly traded entity, the market cap is an estimate of what the company would sell for to a willing buyer.
The total Book Value assumes a company sells all its assets at fair value and uses the proceeds to pay all of its liabilities. Any remaining funds (i.e., shareholder equity) represent the company’s net book value.
Example P/B Calculation
Company ABC Inc. (the “Company”) is a publicly traded entity with shares traded on the NASDAQ. The Company filed Form 10-Q (Quarterly Report) for the period ending March 31, 2023. The March 31, 2023 balance sheet shows total assets of $45,000,000, total liabilities of $35,000,000, and net shareholders equity of $10,000,000.
On March 31, 2023, the Company had 4,000,000 shares outstanding, and the share price was $3.50 per share. The total market capitalization on March 31, 2023, was $14,000,000 (4,000,000 times $3.50).
P/B Ratio = $14,000,000 / $10,000,000
P/B Ratio = 1.40
Interpreting the P/B Ratio
If the ratio is less than one, the company’s fair market value is less than its net book value. A ratio below one could mean the stock is undervalued.