Price / Book Value ratio is used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. It is also known as the “price-equity ratio”.
\(P/B ratio=\frac{Stock Price}{Assets-Intangible Assets and Liablities}\)
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.
Also read: What is Price / Earnings Ratio?
Price to book value ratio is a widely used ratio. It is necessary to estimate the end-year-book value per share for the next period. This can be derived from the historical growth rate by the sustainable growth formula (g=ROE*retention rate).
