Price to Book Value
Also written P/B · P/BV · Price-to-book · Price to Book Value Multiple
Share price divided by book value per share — how many times the accounting net worth of a company the market is willing to pay.
In plain language
Book value is what the balance sheet says the shareholders own: assets minus liabilities. Price to book compares that with what the market is actually charging.
A ratio of 1 means the market values the company at exactly its accounting net worth. Above 1 means the market believes the assets will earn more than their book cost. Below 1 means it believes the opposite — or that the books overstate the assets.
How it works
P/B is most useful where the balance sheet genuinely reflects value: banks, non-banking finance companies and insurers, whose assets are largely financial and carried close to realisable value.
It is least useful for businesses whose value sits in things the balance sheet never recorded — a software firm's engineers, a consumer company's brand, a pharmaceutical company's pipeline. Those companies routinely trade at 8× or 15× book without being expensive, because book value is measuring the wrong thing.
P/B and ROE belong together: a company earning 20% on equity deserves a higher multiple of that equity than one earning 8%.
The formula
P/B = Market price per share ÷ Book value per share
Book value per share = (Shareholders' equity − Preference capital) ÷ Equity shares outstanding
A worked example
Two banks in March:
| Bank A | Bank B | |
|---|---|---|
| Share price | Rs 1,450 | Rs 92 |
| Book value per share | Rs 420 | Rs 115 |
| P/B | 3.45× | 0.80× |
| ROE | 17.5% | 5.2% |
| Gross NPA | 1.8% | 8.4% |
Bank B trades at a 20% discount to its own book value and looks cheap. But it earns 5.2% on that equity — less than a fixed deposit — and 8.4% of its loans have gone bad. If half of those are written off, the book value the market is discounting falls too.
Bank A at 3.45× is not obviously expensive either: earning 17.5% on equity, it roughly triples the value of every rupee retained.
P/B without ROE beside it says almost nothing.
Why NISM asks about it
Chapter 10 covers the relative valuation multiples together. The examinable point is which multiple suits which business — P/B for financials and asset-heavy companies, P/E or EV/EBITDA for most others.
Common exam traps
- A low P/B is not automatically cheap. It is often the market's verdict that the assets are worth less than the books claim.
- Book value excludes preference capital — that belongs to preference shareholders, not equity holders.
- Book value is historic cost less depreciation. Land bought in 1985 sits at 1985 prices, which is why some old manufacturers show absurdly low P/B.
- Companies that have bought back a lot of stock can show tiny or negative book value, making the ratio meaningless rather than attractive.
Check yourself
1.Why can the P/E, EV/EBITDA and EV/EBIT multiples not be applied to certain companies?
- a)Because they only work for listed companies
- b)Because the multiple cannot be applied where the underlying profit metric is negative
- c)Because SEBI prohibits their use in published research
- d)Because they require at least ten years of financial history
Show the answer
Answer: (b) Because the multiple cannot be applied where the underlying profit metric is negative
These multiples divide a price or enterprise value by a profit metric — earnings, EBITDA or EBIT. They cannot be applied if the underlying profit metric is negative, because a negative denominator produces a figure that is not merely wrong but meaningless.
A related problem the workbook flags: where earnings are much lower than their long-term potential — a company just past a loss-making phase, or in a cyclical trough — the multiples would be too high to be meaningful even when technically positive.
The workbook's own answer for loss-makers is EV/Sales: it "is likely to be a more meaningful metric as sales can never be negative" (p209). Price to Book Value is the other multiple that survives a loss year. It focuses on how much an investor needs to invest to gain a claim on the assets, and the book value stays positive even when the current year's profit does not.
One further caution from the workbook: compare against the industry average and the median, since a single extreme comparable can distort the mean.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Book valueA company's net worth — equity capital plus reserves — divided by its outstanding shares, the accounting value each share would theoretically get if the company wound up today.
- Enterprise ValueWhat it would cost to buy the whole business — market capitalisation plus debt, less cash — as opposed to market capitalisation, which buys only the equity.
- Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
- Return on EquityProfit after tax as a percentage of shareholders' net worth — what the company earned on the money its owners have left in it.
- Value AnomalyThe finding that stocks with a high book value-to-price ratio have earned superior risk-adjusted returns — an anomaly against the EMH that underpins value investing.
- Book value per shareEquity shareholders' funds as per the balance sheet divided by the number of equity shares issued and paid up — normally treated as the floor value of a going-concern business.
- Relative valuationValuing an asset from the prices of comparable assets rather than from its own cash flows — quick, intuitive, and dependent on whoever set those comparable prices being right.
- PEG ratioThe price to earnings ratio divided by the expected earnings growth rate — Peter Lynch's way of asking whether a high P/E is justified by the growth behind it.
- Earnings yieldEarnings per share divided by the current market price — the reciprocal of the P/E ratio, expressed as a percentage so that equity can be set directly against a bond yield.
- Other Comprehensive IncomeGains and losses that Ind AS requires or permits to bypass the profit and loss account — they change shareholders' equity and never touch earnings per share.
- Graded Surveillance MeasuresAn exchange surveillance framework that flags small companies whose valuation is out of line with their fundamentals and imposes trading restrictions to warn investors off.
- Price-to-Sales ratioShare price divided by annual net sales per share (or market capitalisation divided by annual net sales) — what investors pay for each rupee of a company's revenue.
- Adjusted book valueFair value of a company's assets minus the fair value of its liabilities, factoring in off-balance-sheet items — used to value non-banking financial companies (NBFCs).
- Companion variablesThe fundamental metric an analyst must read alongside a valuation multiple — such as growth with P/E, or ROIC with EV/EBITDA — to judge whether a low multiple is cheap or a warning.
- Trading CompsRelative valuation using multiples read off current market prices — principally the P/E ratio and the Price to Book Value ratio — as the workbook defines the term.
- Price to Earnings multipleShare price divided by earnings per share — the workbook's most widely used market multiple, and a trading comp an AIF can apply to an unlisted company only through its listed peers.
- Embedded valueFor a life insurer, the present value of the expected net future cash flow — adjusted for probability — from the policies currently in force, used as the base of a Price/Embedded value multiple.
- Book Value approachThe first of the three asset-based valuation methods: value the company at the historical carrying cost of its assets and liabilities, giving a book value per share treated as the floor price.
- P/E ratioShare price divided by earnings per share — how many rupees investors pay for each rupee of earnings. The most common relative valuation measure.
- Dividend yieldDividend per share divided by the share's market price — the cash income a share pays relative to what it costs today. It falls as prices rise and rises as they fall.