Level 6 · Financial Ratios
P/B Ratio
Price against the company's accounting net worth, indispensable for banks.
In this lesson
What you'll be able to do
- Define book value
- Calculate P/B
- Know which sectors P/B suits
- Understand why P/B fails for asset-light firms
Think about it
Why do analysts value banks on P/B but almost never value software companies that way?
Story
Let's picture it
A transport company owns 200 trucks. Sell every truck, repay every loan, and what remains is its book value, something you can almost touch. A design studio owns three laptops and the talent of its people. Its book value is tiny, but its real worth is not on the balance sheet at all.
Visual
Getting to P/B
Total assets
Everything the company owns
− Total liabilities
Everything it owes
= Book value (net worth)
The shareholders' accounting stake
Market cap ÷ Book value
The price-to-book multiple
Plain English
The simple explanation
Book value is total assets minus total liabilities, the shareholders' equity recorded in the balance sheet. P/B compares market value against this accounting net worth.
P/B works best where the balance sheet genuinely captures the business: banks, NBFCs, insurers, and heavy asset owners. For these, the assets are the business.
It works poorly for asset-light companies whose value lies in brands, software, patents and people, none of which appear at their true worth on a balance sheet.
Real world
Indian banking
Analysts routinely value Indian banks on price-to-book because a bank's balance sheet is its business. A bank with poor asset quality tends to trade below book value, because the market doubts the stated worth of its loans.
Watch out
Common mistakes
- Applying P/B to asset-light businesses.
- Assuming P/B under 1 is automatically cheap.
- Ignoring intangible assets and revaluations inside book value.
Did you know?
Book value reflects historical accounting cost, so land bought decades ago may sit on the balance sheet at a fraction of its present market value.
Your turn
Mini challenge
Find the P/B of one bank and one IT company. Explain why the numbers are so different.
Quick quiz
1 / 5
Wrap up
Summary
P/B compares market value with accounting net worth. It is a core tool for banks and asset-heavy companies and a poor one for businesses built on intangibles.
- Book value = assets − liabilities
- P/B suits financials and heavy industry
- Below book is a question, not a bargain
- Intangibles break the ratio
Revise