Definition
The price-to-book ratio compares a stock's market price with the accounting value of shareholders' equity per share. It indicates how much the market pays for each unit of net assets recorded on the balance sheet.
How it works
Book value per share is shareholders' equity divided by shares outstanding. A P/B above 1 means the market values the company above its recorded net assets, often because it expects strong returns on them; a P/B below 1 means the price is under book value, which may signal doubts about asset quality, weak profitability or temporary pessimism.
P/B is most informative for asset-heavy businesses such as banks, insurers and property companies. It says less about firms whose value lies in brands, software or people, because many internally built intangibles are not on the balance sheet.
Formula / convention
P/B = Share price ÷ Book value per share, where Book value per share = Shareholders' equity ÷ Shares outstanding
Illustrative example
Illustration with fictional figures: Bank A has shareholders' equity of HK$8.0 billion and 2.0 billion shares, so book value per share is HK$4.00. At a price of HK$5.00 its P/B is 5.00 ÷ 4.00 = 1.25, and at HK$3.00 it would be 0.75, meaning the shares trade at a discount to book value.
What to watch for
A low P/B can reflect real problems, such as poor asset quality or low returns, rather than a bargain, and book value depends on accounting rules and historical costs. P/B should not be compared across industries with very different asset structures.