Price to Book (P/B) Value Ratio and Equity Valuation

P/B = market price per share / book value per share

  • Book Value per Share = Common Equity / Common Shares Outstanding
  • Common Equity = Total Equity - Preferred Equity

Positives of P/B

  • Book value is usually positive.
  • Many financial services companies trade close to their book values.
  • Book value is less volatile than earnings.
  • Stock return trends can be analyzed within the context of differences in P/B values.

Limitations of P/B

  • Industry differences and asset size differences can create comparability challenges for the P/B ratio metric.
  • Differing accounting practices can create comparability challenges for the P/B ratio metric.
  • P/B is often driven by historical asset values (less depreciation), which may not reflect market value.
  • Book value does not always capture all factors that drive a company's value, such as a unique workforce skill set.

P/B Value for a Constant Growth Company

P0/BV0 = (ROE1 - g) / (rce - g)

For justified P/B ratios:

  • As ROE increases, the P/B ratio increases
  • As rce increases, the P/B ratio decreases

Adjusting Book Value

Common adjustments to book value include:

  • Intangible Assets: When a company overpays for an acquisition, then book value should be reduced by the amount of goodwill recognized.

  • Assets and Liabilities: Book value should be adjusted for assets at historical value (moving them to market value); off balance sheet financing vehicles may also require adjustments to book value.

  • Different Accounting Practices: When comparing companies with different accounting practices, adjustments will need to be made so their P/B ratios are really comparable.

Learn the skills required to excel in data science and data analytics covering R, Python, machine learning, and AI.

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Saylient AI Logo

Take the Next Step in Your Data Career

Join our membership for lifetime unlimited access to all our data analytics and data science learning content and resources.