Price-to-Book (P/B) Ratio
Stock price divided by book value per share. Compares market value to company's net assets.
Why it matters
The P/E ratio tells you how much you pay for a company's profit. The P/B ratio asks a more grounded question: how much are you paying for what the company actually owns? It puts the share price next to the company's book value per share, the net worth recorded on its balance sheet once every debt is paid.
Book value barely moves from day to day, so P/B gives you a steady anchor. When a price falls but the business is intact, a low P/B can flag a possible bargain. When the price runs far ahead of the assets, P/B shows you exactly how large a premium you are paying, and that is the moment to ask what justifies it.
An everyday way to picture it
Picture buying a small furnished flat to rent out. The seller wants ₹50 lakh. You add up what is really there: the flat, the fittings, minus the home loan still owed on it, and it comes to ₹40 lakh of net value on paper. You are paying 1.25 times what the place is worth on its own. That multiple is the P/B.
Pay exactly the net value and your P/B is 1. Pay more and you are above 1, betting the flat earns more rent than its bricks and mortar alone suggest. Pay less and you are below 1: either you found a genuine bargain, or the market knows something about the building that you do not. P/B never settles which on its own. It only tells you how far the price sits from the net value.
What book value really is
Book value is the company's net worth on its own books: everything it owns minus everything it owes. Accountants call it shareholders' equity. It is what would be left for shareholders if the company sold every asset at the value recorded on the books and cleared every debt.
Divide that equity by the number of shares and you get book value per share, the figure that sits under the P/B ratio. Build it yourself: change the balance sheet on the left and watch the P/B fall out on the right.
Build it from the balance sheet
Set the assets, liabilities, shares, and market price to see book value per share and the P/B that follows.
Reading the number: below 1, above 1
A P/B is not "low good, high bad". It is a gauge of how much faith the market has that the assets will earn more than the value stamped on them.
| What you see | What it usually means | The honest catch |
|---|---|---|
| Below 1 | The market values the company at less than its stated net assets. | Could be a real bargain, or a value trap: weak profits, bad loans, or assets worth less than the books claim. |
| Around 1 to 3 | The price sits in a reasonable band around the net assets. | A common, healthy range. Still worth pairing with profitability before you call it cheap. |
| Above 3 | Investors pay well above the assets, expecting them to earn high returns. | Justified only by strong, durable returns on those assets. On a thin one, it is a warning. |
Where P/B works, and where it misleads
P/B is only as honest as the balance sheet behind it. It shines when a company's value genuinely lives in its assets, and it misleads badly when the value lives somewhere the balance sheet cannot see.
| Type of business | Why P/B fits or fails | How to treat it |
|---|---|---|
| Banks and lenders | Assets are loans, cash, and securities, recorded close to real value. | P/B is a core yardstick here. Compare a bank with other banks. |
| Manufacturers, real estate | Value sits in factories, plant, and land that the books actually carry. | P/B is meaningful, though old assets can be on the books below true worth. |
| Software, consulting, brands | Worth is code, patents, reputation, and people, almost none of it on the balance sheet. | Book value understates them, so P/B looks sky-high. Lean on P/E or P/S instead. |
Sunrise Foods sits in the awkward middle: it owns real factories, but a large part of its worth is the brand name on the packet, which the balance sheet never records. That is one reason its P/B looks steep. Pick a sector below to see how far typical multiples differ, then test where a stock sits against its peers.
Compare against the sector norm
Each industry carries its own normal P/B band. Pick one, then set a stock's P/B to see where it lands.
Select a sector to compare a stock's P/B against the norm.
Compare like with like
The first rule of P/B is to compare a company only with its own kind: a bank against other banks, never against a software firm. Two companies with identical assets can carry very different P/B ratios, and the gap is the market's verdict on which deserves the higher price.
Two companies, side by side
Give both firms a balance sheet and a price to see which trades closer to its book value.
Company A
Company B
Pair it with return on equity
A P/B ratio means little until you ask what the company earns on that book value. Return on equity (ROE) is the profit a company makes on each rupee of equity. A business with a high ROE earns more from the same assets, so it fairly deserves a higher P/B. A high P/B resting on a thin ROE is the real warning sign. Move the ROE below and watch the P/B it can justify.
How much P/B does the ROE justify?
A rough guide: the higher the return on equity, the higher the P/B a company can reasonably carry.
Fair P/B at 15% ROE: 1.50
See it for yourself
Adjust Sunrise's price and book value per share, and watch both the P/B and where it sits on the scale.
Worked example: Sunrise Foods
Sunrise Foods makes packaged snacks and staples sold across India. It is a steady, profitable consumer brand, the kind of business a beginner can reason about without specialist knowledge.
Let us build its P/B from the balance sheet, the same figures we reuse across these lessons.
| Step | Working | Result |
|---|---|---|
| Total assets | From the balance sheet | ₹1,700 crore |
| Total liabilities | All debts and dues | ₹700 crore |
| Book value (equity) | ₹1,700 crore - ₹700 crore | ₹1,000 crore |
| Shares outstanding | Shares the company has issued | 10 crore |
| Book value per share | ₹1,000 crore ÷ 10 crore shares | ₹100 |
| Share price today | What the market is charging | ₹500 |
| P/B | ₹500 ÷ ₹100 | 5.0 |
So you pay ₹5.0 for every ₹1 of Sunrise's net assets, which leaves it richly priced against its assets. For a brand-driven packaged-foods company, a P/B of 5.0 is not the whole story: its books carry the factories but not the brand. It also earns a 20 percent return on equity, well above average, which is part of why the market pays up. The premium is real, but so is the quality behind it.
Your call
At Sunrise's real P/B of 5.0, you are paying a clear premium to its net assets. Would you buy it now, or wait for a price closer to its book value?
Remember this
| P/B level | What it usually signals | How to read it |
|---|---|---|
| Below 1 | Price sits under the stated net assets | Possible bargain, or a value trap. Check why it is cheap. |
| 1 to 3 | A reasonable band around net assets | Common and healthy. Pair it with ROE before calling it cheap. |
| Above 3 | A clear premium to the assets | Justified only by strong, durable returns on those assets. |
| Best used for | Asset-heavy firms: banks, lenders, real estate, manufacturing | Lean on P/E or P/S for asset-light, brand-driven firms. |
| Always pair with | Return on equity (ROE) | High ROE earns more on each rupee of book, so it earns a higher P/B. |
In short: P/B tells you how much you pay for what the company truly owns. It is sharpest when the assets are the business, and it misleads when the real value lives in a brand or in people the books never record.