Glossary · Beginner
PBV Ratio (Price-to-Book Value)
Share price against the accounting value of a company's net assets — most useful for banks and asset-heavy businesses.
P/B Ratio (Price-to-Book Value)
The price-to-book ratio compares what the market charges for a company against what its balance sheet says the company's net assets are worth.
The formula
P/B = Market capitalisation / (Total assets - Total liabilities)
The denominator is book value: everything the company owns minus everything it owes, as recorded in the accounts.
How IQInvest reads it
- Below 1.0 — below book. The market values the company at less than its balance sheet. Common in banks, and in businesses the market distrusts.
- 1.0-3.0 — a typical range for an established company.
- Above 3.0 — well above book. Normal for asset-light businesses.
Why a high P/B is often meaningless
Book value only counts what accountants record. It captures factories, inventory and cash. It does not capture brands, software built in-house, network effects or the people who work there.
So a software company will always look expensive on P/B, because almost none of what makes it valuable appears on its balance sheet. Apple trades at a P/B in the tens for exactly this reason, and it says very little about whether the shares are dear.
Where P/B genuinely earns its place is banks and insurers, whose assets really are financial instruments carried at something close to market value. There, a P/B below 1 is a real signal worth investigating.
Related
- Price-to-sales is the alternative when a company has assets but no profit.
- The P/E ratio compares price to earnings rather than assets.