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Price to book ratio definition

Description

Price to book ratio shows the company’s shares value, comparing market value with its’ book value. Data to calculate this ratio is collected from balance sheet and stock market bulletin.

This ratio is important for those who own or wishes to own stocks, because it shows the proportion between stock’s price and book value. This ratio is calculated by using a conservative method, because intangible assets are deducted from company’s assets. A more popular way to calculate this ratio you can find here (Price to book value ratio)

Norms and limitations

In general there are no norms for this ratio.

However a simple explanation (but not the only one, and sometimes not even the most trustworthy one) of the ratio’s value might be that a lower P/B ratio could mean that the stock is undervalued, while a higher values could mean it’s overvalued. Of course this ratio might vary depending on the industries.

Formula

Stock price shows the total price of all shares outstanding at the current market price.

Assets (Total assets) – mean every asset that the company owns and that is shown on the balance sheet.

Intangible assets are fixed and current assets that cannot be expressed in physical form.

Debt (total debt, total liabilities) is calculated adding together long term debt with short term debt. These two measures can be easily located on the balance sheet.