P/B only makes sense next to ROE
Book value is shareholders' equity — assets minus liabilities, per share. The P/B ratio tells you how many dollars you are paying for each dollar of that accounting net worth.
On its own, P/B is nearly meaningless. A bank at 0.8× book and a software company at 12× book are not comparable, because the bank's assets are loans marked close to reality while the software company's value is people and code that barely appear on the balance sheet.
The fix is the second output. Since earnings yield equals ROE divided by P/B, a company earning 30% on equity at 3× book delivers a 10% earnings yield, while 8% ROE at 3× book delivers under 3%. Same multiple, completely different investment. This is why P/B plus ROE is the classic value screen, and why it underpins the Graham Number.
When book value is meaningful — and when it is not
Book value per share is shareholders' equity divided by share count. It is the accounting residual after liabilities are subtracted from assets. For a manufacturer with factories, inventory and equipment, book value approximates the replacement cost of those physical assets, and price-to-book can be a useful test of "am I buying the business for less than the assets are worth".
For a software company, a brand-led consumer business or a professional services firm, the productive assets are people, code and reputation, none of which sit on the balance sheet at anything close to their economic worth. Their book value is a relic of past accounting decisions and P/B will look permanently elevated. That does not mean the company is expensive; it means the metric is the wrong tool for the asset class.
Where P/B misleads
Intangibles off the balance sheet. Most developed-market acquisitions capitalise only a fraction of the goodwill paid; internally generated intangibles rarely appear at all. A company whose entire economic value is intangible will have a low book value that bears no relation to a fair price.
Real estate at historical cost. Property companies, especially older ones, often hold assets at cost minus depreciation while their market value is several times higher. Their reported book value dramatically understates the economic equity, and a low P/B may simply reflect out-of-date balance sheets rather than a bargain.
Financial firms with leverage. Banks and insurers carry financial assets and liabilities close to market value. Their book value is unusually meaningful — but their returns depend on the spread between assets and liabilities, which P/B ignores. Use P/Tangible book (excluding goodwill and intangibles) for financials, paired with ROE and the bank's net interest margin.
How to read a low P/B
A stock trading at 0.7× book is not automatically a bargain. It can mean the market thinks the assets will be written down, that returns on equity are too low to justify the book value, or that earnings will collapse. The metric screens cheaply for a reason; the work is in finding out which reason.
Formula
P/B = Share Price ÷ Book Value per Share · Implied Earnings Yield = ROE ÷ P/B
FAQ
What is a good P/B ratio?
Context-dependent. Banks and insurers commonly trade between 0.5× and 1.5×; quality consumer brands at 5-10×; asset-light software higher still. Below 1.0× can indicate value, but often signals that the market doubts the asset values or future profitability.
Why does P/B work poorly for tech companies?
Because their most valuable assets — engineering talent, brand, network effects, proprietary data — are expensed rather than capitalized. Book value understates reality, so the multiple looks absurdly high without meaning the stock is expensive.
Is a P/B under 1 automatically a bargain?
No. It can mean the assets are worth less than stated — bad loans, obsolete inventory, goodwill that should be written off. Check whether the company is actually earning a decent return on that book value before treating it as cheap.
How do I find book value per share?
Total shareholders' equity divided by shares outstanding, both from the most recent balance sheet. For financials, tangible book value — excluding goodwill and intangibles — is the more conservative and more commonly used version.
Related calculators
- P/E Ratio Calculator — multiple, earnings yield, PEG, target price
- EV/EBITDA Calculator — enterprise value against operating earnings
- EPS Calculator — basic and diluted earnings per share
More calculators
- DuPont ROE Calculator — break return on equity into its three drivers
- Position Size Calculator — how many shares to buy for a set risk
- DCF Calculator — fair value from five years of cash flow plus terminal value
- Dividend Discount Model — Gordon Growth valuation for dividend payers
- CAGR Calculator — compound growth rate and forward projections
- Dividend Yield Calculator — yield, income per $10,000, capital needed
- Payout Ratio Calculator — dividend safety and sustainable growth
- Graham Number Calculator — Graham's maximum buy price
- Total Return Calculator — price change plus dividends, annualized
- WACC Calculator — weighted average cost of capital for discounting
- Two-Stage DDM Calculator — high-growth then stable dividend valuation
- Margin of Safety Calculator — discount between value and price
- Compound Interest Calculator — future value with periodic contributions
- Reverse DCF Calculator — the growth rate today's price already assumes
Guides
- How to Value a Stock — the full valuation sequence, with a worked example
- Free Cash Flow Explained — the input every DCF depends on
- Margin of Safety Explained — why the discount is not optional
- Dividend Investing Guide — yield, payout ratio and dividend safety
- How to Read a Cash Flow Statement — three sections, eight combinations
- Intrinsic Value vs Market Price — why the two diverge, and how to behave
- How to Read a Balance Sheet — the asset side, and the four ways it misleads
- What Is a Good P/E Ratio? — the arithmetic behind a justified multiple
- Dividend Yield vs Total Return — why a high yield is not a high return
- How to Compare Two Stocks — a five-axis framework, worked side by side
- WACC Explained — the discount rate, built from five sourced inputs
- The DCF Method Explained — the forecast half of a DCF, and checking the terminal value
- The Graham Number Explained — Graham's ceiling tested on two companies, and what it cannot see