PB Ratio (Price-to-Book Ratio)
The PB ratio compares a company's market value to its book value (assets minus liabilities). It tells you whether you're paying a premium or getting a discount on the company's net assets.
The PB ratio compares a company's market value to its book value (assets minus liabilities). It tells you whether you're paying a premium or getting a discount on the company's net assets.
Formula
Example
If share price is $50 and book value per share is $25, PB = 2.0. You're paying twice the book value.
How to Interpret It
PB < 1 may indicate undervaluation. PB > 3 suggests high expectations. Most useful for asset-heavy industries like banking, insurance, and real estate where book value reflects tangible assets.
PB Ratio by Industry
| Industry | Typical PB | Why |
|---|---|---|
| Banks & Financials | 0.5x - 1.5x | Asset-heavy, regulated, tangible book value |
| Utilities | 1x - 2x | Property and equipment form most of book value |
| Technology | 3x - 10x+ | Intangibles (software, patents) not on balance sheet |
| Real Estate (REITs) | 0.8x - 2x | Property values may differ from book value |
Real-World Example: 2008 Financial Crisis
During the 2008 financial crisis, many bank stocks traded below book value (PB < 1.0). Some were genuine bargains — strong banks temporarily punished by sector-wide panic. Others were value traps because their "assets" (mortgage-backed securities) were worth far less than stated on the balance sheet. This illustrates why PB ratio must be combined with asset quality analysis.
Common Mistakes
- Ignoring intangible assets: Software companies have most value in patents, brands, and code — none of which show up on the balance sheet. PB ratio is nearly useless for tech stocks.
- Not adjusting for goodwill: Companies that overpay for acquisitions inflate book value with goodwill. Subtract goodwill for a more conservative "tangible book value" comparison.
- Assuming PB < 1 is always a bargain: A stock trading below book value might be cheap for good reason — declining business, obsolete assets, or poor management. Always investigate why.
- Comparing PB across industries: A PB of 2 for a bank is high; for a tech company it's low. Always compare within the same industry.
Pro Tips
For banks, combine PB with ROE: A bank with PB below 1.0 and ROE above 10% is often undervalued. A bank with PB below 1.0 and ROE below 5% may be a value trap.
Use Tangible Book Value: Subtract goodwill and intangible assets from book value for a cleaner comparison. This is especially important for companies that have done many acquisitions.
Frequently Asked Questions
What is a good PB ratio?
It depends on the industry. For banks, PB below 1.5 is typical; for tech companies, PB above 5 is common. Always compare within the same sector. A PB below 1.0 may signal undervaluation, but could also mean the market doubts the company's asset quality.
Why would a stock trade below book value?
Stocks trade below book value when investors believe the company's assets are overvalued on the balance sheet, the business is declining, or management is poor. During market panics, even healthy companies can trade below book value temporarily — creating opportunities for value investors.
Is PB ratio useful for tech stocks?
Generally no. Tech companies derive most value from intangible assets (software, patents, brand, user base) that don't appear on the balance sheet. A tech company with PB of 10 isn't necessarily overvalued — its true assets aren't reflected in book value. Use PE or revenue multiples instead.
What's the difference between PB and PE ratio?
PB compares price to assets (balance sheet), while PE compares price to earnings (income statement). PB is better for asset-heavy businesses like banks; PE is better for profitable companies with steady earnings. Use both together for a fuller picture.