Enterprising Investor Forum

Price-To-Book Ratio (P/B Ratio) Tuesday, June 19, 2007

Book Value shows us the account value of a company. In other words, if the company were liquidated, this is what the shareholders would theoretically receive.

In most cases, the market value of a company (current stock price) will be higher than the accounting book value. When analyzing this specific variable, investors look for a company where the book value is:

1. Lower than the industry average book value.
2. Close or equal to the book value for that specific company.
3. In extreme cases, lower than the book value for that specific company (please note that if the result is substantially lower, it could mean that there is something seriously wrong with the company).

Why is the book value generally higher in the open market? Because the market price takes into account expectations of future growth and profitability which are not accounted for in the balance sheet.

The Price-To-Book Ratio (P/B Ratio) is calculated by dividing the last closing price of the stock by total assets minus intangible asset and liabilities.