The price to book ratio, also known as market to book ratio, measures the relative value of a company compared to its share price. The ratio can also be calculated as total market value over total book value as the per-share part in the equation washes out.
Price to book ratio is a great tool to quickly determine whether a company is under or overvalued. If the company has a low price to book ratio, it is undervalued and considered a good investment opportunity
Formula for Price to Book Ratio
\(Price\,to\,book = \frac{{Market\,price\,per\,share}}{{Book\,value\,per\,share}}\)
Example
Wipro Company has a share price of Rs.60.15 at the end of the year and a book value per share of Rs.50.20 at the end of the year. This gives a price to book ratio of 1.19. This means that the company is overvalued and that the investors are willing to pay a premium to purchase the shares. A price to book ratio of less than 1 indicates that the company is undervalued.
