P/B ratio
Also called: P/B, price to book, price-to-book, book value
Share price divided by book value per share: how much you pay for each rupee of net assets on the balance sheet.
Book value is what the accounts say a company owns after paying every liability. It is also called shareholders’ equity. Divide it by the number of shares to get book value per share, then divide the share price by that.
P/B is most useful for banks, housing finance companies and insurers, whose assets are mostly loans and investments recorded close to their real value. For a software firm or a consumer brand it says little, because what makes those businesses valuable, their people and their brands, never appears on the balance sheet.
Example
A bank’s share trades at 450 rupees and its book value per share is 150. Its P/B is 3: you pay three rupees for every rupee of net assets.
Watch out
P/B always equals P/E multiplied by ROE. If a screener shows three numbers that break this rule, one of them is wrong or they come from different periods.
Learn it properly in
Chapter 1.2: P/E, P/B and ROE: three ratios that do most of the work