Beginner's guide to investing: the price-to-book ratio
Tim Bennett Oct 22, 2010
The latest in Tim Bennett's video tutorials for novice investors. An explanation of the price-to-book ratio, a widely-used valuation yardstick
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Price to book ratio
Price-to-book value ratio (p/bv) is a widely used valuation yardstick. It is calculated by dividing the current share price by its book value per share. You can work this out by taking the book value (all fixed and current assets minus current and long-term liabilities) and dividing by the total number of shares in issue.
A p/bv of less than one suggests that the market is valuing the company at less than the value of its assets, and that it may therefore be cheap. But p/bv should be interpreted with care. Although it works well when analysing companies that have high levels of tangible assets, it is less helpful when looking at those that have large amounts of goodwill or intellectual property on their balance sheets.
• Entry from MoneyWeek's Financial glossary.