Price-to-book compares market price to accounting net worth per share. Value investors use it alongside return on equity to spot cheap — or deservedly cheap — stocks.
A P/B below 1 means the market prices the company below its book value, which can signal a bargain or deep problems. High-ROE businesses justifiably trade at higher multiples.
Book value understates asset-light businesses (software, brands), so P/B works best for banks, insurers and industrials.
Book value is an accounting figure, and buybacks distort it in a way that catches people out. A company repurchasing shares above book value reduces book equity faster than it reduces share count, pushing P/B up while nothing about the business has changed. Several large and highly profitable companies carry negative book value for this reason alone.
Read alongside return on equity it becomes far more informative. A business earning 20% on equity deserves to trade well above book; one earning 4% does not, and a low P/B there is the market pricing weak returns correctly rather than offering a discount.
Tangible book value is the stricter version, stripping out goodwill and other intangibles created by past acquisitions. For a company that has grown by buying others, the gap between the two can be most of the balance sheet, and it is the tangible figure that a liquidation-style comparison actually rests on.
Frequently asked questions
What does a P/B below 1 mean?
The market prices the company below its accounting net worth. That can be a bargain — or a fair verdict on poor profitability or doubtful asset values. Return on equity tells you which.
What is the Graham Number?
A value-investing heuristic: the square root of 22.5 × EPS × book value per share, an upper bound Benjamin Graham suggested for a defensive purchase price.
When is price-to-book misleading?
For asset-light businesses — software, brands, services — whose real value barely appears on the balance sheet. P/B works best for banks, insurers and capital-heavy industry.