The price-to-book ratio, in English, is P/B Ratio, or P/BV Ratio, which values a company by calculating the ratio of the company's market value to the book value of common shares (here specifically refers to the book value minus preferred stock equity). What is compared is the relationship between the company's market value and net assets. Like other valuation indicators such as the price-to-earnings ratio and the price-to-sales ratio, the price-to-book ratio has a relatively accurate price comparison function within a certain range. However, the price-to-book ratio also has its own limitations. What do you need to pay attention to when you use the price-to-book ratio to value a company? First of all, the net asset value is not necessarily exactly equal to the value of the enterprise. The cash value of the net assets of most enterprises is much lower than the disclosed net asset value, because many plants, equipment or other tangible assets have significantly depreciated when some enterprises are sold or liquidated. This leads to a lower price-to-book ratio due to high net assets when calculating the price-to-book ratio, but in fact, the company's real assets are not as much as the disclosed net asset value. What does a high price-to-book ratio mean? A high price-to-book ratio usually means the stock price is higher than the company's book price, which could mean two things: The company is operating well and attracting a large number of investors, so the stock price rises and the price-to-book ratio rises, which may mean that the stock price is overvalued; The company's book value shrinks, making the denominator of the calculation formula smaller. Such companies are often value traps. As with a low price-to-book ratio, the true value of a stock cannot be judged by relying solely on the price-to-book ratio. Therefore, you need to combine historical price-to-book ratio data over a period of time and other financial indices to comprehensively analyze the true value of a stock. Price to Book Ratio vs Price to Earnings Ratio The price-to-book ratio is more suitable for valuing asset-intensive companies and measures the market value of a company's assets relative to its book value. The P/E ratio is more suitable for evaluating a company's current profitability and the market's expectations for its future earnings growth, so it is more commonly used when analyzing companies with high profitability or growth. The following is a comparison table of price-to-book ratio and price-to-earnings ratio: price to book ratio price to earnings ratio Define share price / book value per share share price / earnings per share The measure measures the ratio of a company's stock price to its book value, reflecting the market's estimate of the value of the company's assets. Measures the ratio of a company's stock price to its earnings per share and reflects the market's estimate of the company's profitability. Applicable industries are suitable for asset-intensive industries, such as finance, real estate and manufacturing. Applicable to all industries, especially those with high profitability or growth potential. It mainly reflects the valuation level of the market value of the company's assets relative to its book value. Reflects the company's current profitability and market expectations for its future earnings. The influencing factors are affected by the company's asset status, liability level, value of intangible assets and other factors. Affected by factors such as company profitability, market expectations, and industry prospects. Interpretation of high and low A high price-to-book ratio may indicate that the market has a high valuation of the company's assets or that the company's assets are used efficiently; a low price-to-book ratio may indicate that the company is undervalued or has risks. A high P/E ratio may indicate that the market is optimistic about the company's future earnings expectations; a low P/E ratio may indicate that the market is cautious about the company's future profitability. The main purpose is to evaluate the market value of company assets, especially during asset revaluation and bankruptcy liquidation. It is used to evaluate the company's profitability and investment return expectations, and is often used in companies with growth and stable profitability. The limitations do not apply to companies with a large proportion of intangible assets and may underestimate the value of growing companies. Not applicable to unprofitable companies or companies operating at a loss, and may overestimate the value of a startup. Suitable for valuation Suitable for valuation of companies with clear and stable asset values. It is suitable for evaluating companies with clear profitability and strong market expectations. Comparison of price-to-book ratios across U.S. industries The data below is as of January 2024. Industry Industry Number of companies Price to sales ratio Advertising575.76 Aerospace/Defense705.08 Air Transport252.24 Apparel382.56 Auto & Truck344.6 Auto Parts392 Bank (Money Center)151.05 Banks (Regional)6251.02
Beverage (Alcoholic)193.1 Beverage (Soft)297.42 Broadcasting220.8 Brokerage & Investment Banking271.66 Building Materials444.74 Business & Consumer Services1625.54 Cable TV102.06 Chemical (Basic)321.98 Chemical (Diversified)41.97 Chemical (Specialty)682.67 Coal & Related Energy181.79 Computer Services724.37 Computers/Peripherals3630.98 Construction Supplies453.92 Diversified231.87 Drugs (Biotechnology)5726.14 Drugs (Pharmaceutical)2455.2 Education312.72 Electrical Equipment1032.92 Electronics (Consumer & Office)131.9 Electronics (General)1293.28 Engineering/Construction433.33 Entertainment982.59 Environmental & Waste Services576.25 Farming/Agriculture422.73 Financial Svcs. (Non-bank & Insurance)1723.43 Food Processing822.3 Food Wholesalers144.1 Furn/Home Furnishings312.25 Green & Renewable Energy170.85 Healthcare Products2304.63 Healthcare Support Services1193.34 Healthcare Information and Technology1284.09 Homebuilding322 Hospitals/Healthcare Facilities325.12 Hotel/Gaming6811.06 Household Products937.33 Information Services184.06 Insurance (General)212.86 Insurance (Life)231.62 Insurance (Prop/Cas.)502.3 Investments & Asset Management3342 Machinery1034.34 Metals & Mining683.22 Office Equipment & Services172.54 Oil/Gas (Integrated)41.82 Oil/Gas (Production and Exploration)1661.94 Oil/Gas Distribution242.32 Oilfield Svcs/Equip.1001.98 Packaging & Container222.57
Paper/Forest Products72.42 Power501.71 Precious Metals612.04 Publishing & Newspapers212.05 R.E.I.T.1932.01 Real Estate (Development)171.35 Real Estate (General/Diversified)111.25 Real Estate (Operations & Services)602.87 Recreation553.46 Reinsurance11.31 Restaurant/Dining64NA Retail (Automotive)306.97 Retail (Building Supply)16NA Retail (Distributors)624.03 Retail (General)267.24 Retail (Grocery and Food)142.9 Retail (REITs)281.94 Retail (Special Lines)1054.78 Rubber & Tires30.79 Semiconductor637.38 Semiconductor Equip308.1 Shipbuilding & Marine81.36 Shoe138.71 Software (Entertainment)846.24 Software (Internet)359 Software (System & Application)35111.03 Steel291.76 Telecom (Wireless)132.53 Telecom. Equipment665.14 Telecom. Services421.3 Tobacco16NA Transportation365.38 Transportation (Railroads)46.91 Trucking223.58 Utility (General)141.65 Utility (Water)132.3 Total Market64813.78 Total Market (without financials)52144.47 Data source: Price and Value to Book Ratio by Sector (US) FAQ