A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value/ share.
Also known as price-equity ratio.
P/B ratio = Stock price/ total assets – intangible assets & liabilities.
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios , be aware that this varies by industry. This ratio also gives some idea of whether you are paying too much for what would be left, if the comapny went bankrupt immediately.
Industries that require more infrastructure capital( for each dollar of profit) will usually trade at P/B ratios much lower than, for eg , consulting firms. P/B ratios are commonly used to compare banks, because most assets & liabilities of banks are constantly valued at market values.
P/B ratios , do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders.
P/B should also be calculated on a diluted basis because stock options may well vest on sale of the company or change of control or firing of management.