Price-to-Book Ratio (P/B)
Price-to-Book Ratio (P/B)
A valuation metric comparing a stock's market price per share to its book value per share, calculated as Market Price ÷ Book Value per Share. Ratios below 1.0 may indicate undervaluation or financial distress, while higher ratios suggest investors expect growth or premium assets. Commonly used for evaluating financial institutions and asset-heavy companies.
A bank stock trading at $40 per share with a book value of $50 per share has a P/B ratio of 0.80, suggesting it may be undervalued relative to its net assets or facing profitability concerns.
Students often assume a low P/B ratio always indicates a good buy, but it can also signal poor earnings prospects, asset quality issues, or industry-wide distress. P/B is most useful for asset-heavy companies, not service or tech firms with intangible assets.
How This Is Tested
- Calculating P/B ratio given market price per share and book value per share
- Interpreting P/B ratios below 1.0 versus above 1.0 in fundamental analysis
- Determining which types of companies (banks, utilities, asset-heavy) are best evaluated using P/B
- Comparing P/B ratios across similar companies to identify relative valuation
- Understanding limitations of P/B for companies with significant intangible assets (technology, service firms)
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| P/B Ratio calculation formula | Market Price per Share ÷ Book Value per Share | Book value = (Total Assets - Total Liabilities) / Shares Outstanding |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Jennifer, a value-oriented investor, is analyzing two regional banks for her portfolio. Bank A trades at $45 per share with a book value of $60 per share, while Bank B trades at $80 per share with a book value of $50 per share. Both banks have similar profitability and asset quality metrics. Based solely on the Price-to-Book ratio analysis, which bank appears more attractive from a value perspective?
A is correct. Bank A has a P/B ratio of $45 / $60 = 0.75, meaning it trades at 75% of its book value. This suggests the market is pricing the stock below its net asset value, which is attractive for value investors. Bank B has a P/B ratio of $80 / $50 = 1.60, meaning investors are paying a 60% premium over book value.
B is incorrect because while a higher P/B may indicate investor confidence, value investors typically seek stocks trading at or below book value. C is incorrect because absolute share price is irrelevant for valuation comparisons; the P/B ratio standardizes the comparison. D is incorrect because higher P/B ratios do not "always" indicate better prospects; they may simply indicate overvaluation or market optimism that may not be justified.
The Series 65 exam tests your ability to apply fundamental analysis metrics like P/B ratio to real investment scenarios. Understanding that value investors seek low P/B ratios (especially below 1.0) while recognizing that context matters (similar profitability and asset quality) is critical for making appropriate client recommendations.
What does a Price-to-Book (P/B) ratio of 0.80 indicate about a company's stock?
B is correct. A P/B ratio of 0.80 means the market price per share is 80% of the book value per share, indicating the stock trades below its accounting net worth. This can signal either undervaluation or concerns about asset quality or future profitability.
A is incorrect because 0.80 means the stock trades at 80% of book value (a 20% discount), not 80% above. C confuses P/B with Return on Equity (ROE) or earnings metrics. D incorrectly interprets P/B as a measure of the asset-to-liability ratio, which is not what P/B measures; it compares market price to book value per share.
The Series 65 exam frequently tests interpretation of valuation ratios. Understanding that P/B below 1.0 means trading below book value (potential undervaluation) versus above 1.0 (market premium) is fundamental to equity security analysis and making suitable recommendations for value-oriented clients.
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Access Free BetaA company has total assets of $500 million, total liabilities of $300 million, and 10 million shares outstanding. If the stock currently trades at $25 per share, what is the company's Price-to-Book ratio?
C is correct. Calculate in steps:
1. Book Value = Total Assets - Total Liabilities = $500M - $300M = $200M
2. Book Value per Share = $200M / 10M shares = $20 per share
3. P/B Ratio = Market Price / Book Value per Share = $25 / $20 = 1.25
This means investors are paying $1.25 for every $1.00 of book value, a 25% premium over the company's net accounting value.
A (0.50) incorrectly divides book value by market price ($20 / $40), inverting the formula. B (1.00) might result from miscalculating book value per share. D (2.00) incorrectly uses $500M / $200M instead of calculating per-share values first.
P/B ratio calculations are common on the Series 65 exam. The most frequent errors include forgetting to calculate book value per share (not just total book value) and inverting the ratio. Understanding the three-step process (calculate total book value, divide by shares, then divide market price by book value per share) is essential.
All of the following statements about the Price-to-Book ratio are accurate EXCEPT
C is correct (the EXCEPT answer). P/B ratio is NOT equally useful across all company types. It works best for asset-heavy companies (banks, insurers, manufacturers, utilities) where book value accurately reflects economic value. For technology and service companies with significant intangible assets (intellectual property, brand value, customer relationships), book value severely understates true economic value, making P/B less meaningful.
A is accurate: P/B = Market Price per Share / Book Value per Share is the correct formula. B is accurate: A low P/B can indicate either a bargain (undervalued relative to assets) or problems (poor earnings, asset quality concerns, industry distress). D is accurate: Banks and asset-heavy companies have tangible assets that book value captures well, making P/B particularly relevant for these sectors.
The Series 65 exam tests your understanding of which analytical tools are appropriate for different types of securities. Recognizing that P/B is industry-specific (useful for banks and asset-heavy firms, less useful for tech/service companies) is critical for proper fundamental analysis and avoiding misapplication of valuation metrics.
An analyst is evaluating a utility company trading at $36 per share. The company has $800 million in total assets, $500 million in total liabilities, and 15 million shares outstanding. Which of the following statements are accurate?
1. The company's book value per share is $20
2. The company's P/B ratio is 1.80
3. The stock is trading at a discount to book value
4. A P/B above 1.0 always indicates overvaluation
A is correct. Only statements 1 and 2 are accurate.
Statement 1 is TRUE: Book Value per Share = (Total Assets - Total Liabilities) / Shares Outstanding = ($800M - $500M) / 15M = $300M / 15M = $20 per share.
Statement 2 is TRUE: P/B Ratio = Market Price / Book Value per Share = $36 / $20 = 1.80. The stock trades at 1.8 times its book value.
Statement 3 is FALSE: A P/B of 1.80 means the stock trades at a premium (80% above book value), not a discount. Trading at a discount would require a P/B below 1.0.
Statement 4 is FALSE: P/B above 1.0 does not "always" indicate overvaluation. Many profitable, well-managed companies with strong growth prospects justifiably trade above book value. The premium reflects expected future earnings, quality of assets, or competitive advantages. Context and comparison to industry peers matter.
The Series 65 exam tests multi-step analytical reasoning involving P/B ratios. Understanding the calculation process, correct interpretation of results (premium vs. discount), and avoiding absolute statements about valuation (P/B above 1.0 can be justified) demonstrates the comprehensive knowledge required for equity analysis and client advising.
💡 Memory Aid
Think "Price vs. Pages in the Book": P/B compares what investors pay (market price) to what accountants wrote down (book value). Formula: Market Price ÷ Book Value per Share. Below 1.0 = trading for less than the "pages are worth" (potential bargain or trouble). Best for banks and asset-heavy companies, not tech firms with intangible value.
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This term is part of this cluster:
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