Price To Book Ratio Definition with Example
Price To Book Ratio Definition – “A ratio comparing the market’s valuation of a company to the value of that company as indicated by its owners’ equity”.
In simple words, this ratio compares the market price of stock with that of the book value of the stock. P/B ratio is one of the financial tool which analyzes whether the stock is overvalued or undervalued. To be precise, this ratio measures the difference between the book value and the market value of the share.
Market value is the value at which the buying and selling of share is taking place in the stock market. However, the book value of share is the value that appears on the Balance Sheet. Market price means the price that market thinks of the share whereas the book value is the actual worth of the share.
Price to Book Ratio = Market Price per share/ Book Value per share
Market to Book Ratio = Total Book Value/Total Market Value
Price To Book Ratio Example
To understand the Price to book ratio definition in a better way, let’s discuss an example
ABC Ltd is a company whose 1,00,000 shares are outstanding that are selling @Rs 10. The worth of net assets are Rs. 50,000.
P/B Ratio = 10/10
Related Financial Terms of Price To Book Ratio
- Price Earnings Ratio Definition | Formula | Example | Analysis
- Valuation Definition – Procedure and Importance
Importance of Price To Book Ratio
P/B Ratio is mostly used by the investors or analyst in order to evaluate the true worth of the share that is trading in the market. There is possibility that without having physical existence of the assets, the company’s share is still trading at higher price. The reason behind this could be intense promotion of their upcoming plans.
P/B ratio greater than 1 implies that investors are willing to pay more than the actual worth of the share. The reason behind could be that investor see that organization has healthy future.
PB ratio less than 1 means that the stock price of the company is currently trading less than the actual worth of the company’s net assets. This indicates that the stock is undervalued.
We cannot say that this is the most reliable factor to analyse the worth of the company as factors such as dividend, etc are not considered. The main purpose of this ratio is to provide a rough of idea about whether they are investing in right stock or not.