Understanding Price-to-Book (P/BV) Ratio

The price-to-book value (P/BV) ratio is a valuation metric used to compare a company's market price with its book value. This ratio helps investors assess whether a stock is under or overvalued relative to its intrinsic worth. Commonly used in asset-heavy sectors, the P/BV ratio relates equity value with investor sentiment. This page explores its meaning, calculation, interpretation, and practical implications.

The P/BV ratio stands for Price-to-Book Value ratio. It measures the relationship between a company’s market price per share and its book value per share. It reflects how much investors are willing to pay for each rupee of a company’s net assets.

The “price” is the market value per share, while the “book value” is derived from a company’s balance sheet—total assets minus total liabilities. It shows the value shareholders might receive if the company were liquidated.

This ratio provides insights into how the market values a company's net worth. A P/BV ratio:

• Below 1 may imply undervaluation or underlying issues
  

• Around 1 suggests parity between book value and market price
  

• Above 1 indicates expected future growth or profitability
  

It helps assess if the market is overpricing or underpricing a stock relative to its tangible asset base.

The P/BV ratio is calculated using:

P/BV Ratio = Market Price per Share ÷ Book Value per Share

It may be calculated on a historical or projected basis, based on available data.

To calculate book value per share:

Book Value = Total Assets - Total Liabilities
Book Value per Share = Book Value ÷ Total Number of Outstanding Shares

These figures are found in a company’s financial statements.

Example Table: Book Value per Share Calculation

This result is then used to derive the P/BV ratio.

A high or low P/BV must be understood in industry context:

• High P/B (>3): Indicates strong market expectations
  

• Low P/B (<1): Suggests undervaluation or potential risk
  

The P/B ratio is most useful when comparing similar companies in the same industry, alongside metrics such as the put call ratio.

Example 1: High P/BV

Company A’s stock price is ₹500 and its book value is ₹100:

P/BV = 500 ÷ 100 = 5.0

This suggests optimism about the company’s growth.

Example 2: Low P/BV

Company B’s stock price is ₹75 and book value is ₹100:

P/BV = 75 ÷ 100 = 0.75

This may indicate undervaluation or performance concerns.

The P/BV ratio has a few limitations:

• Excludes Intangibles: Ignores brand, goodwill, or intellectual property
  

• Accounting Differences: Methods affect asset and liability values
  

• Not universal: Less effective in intangible-heavy sectors like tech
  

• Static View: Does not capture growth potential
  

It’s best used alongside ratios like P/E, ROE, or EV/EBITDA.

The ratio is effective in:

• Asset-heavy industries: Such as banking and real estate
  

• Peer comparison: Within industry averages
  

• Distress screening: Spotting potential turnaround cases
  

P/BV is a helpful valuation check when used with other tools.

The price-to-book value ratio offers an asset-focused view of a company’s valuation. It compares the market's perceived value to the firm’s tangible net worth. Though limited in scope, it adds useful context to equity evaluation.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.