P/B ratio
Price to book
The share price against the accounting value of the company's net assets.
Book value is assets minus liabilities: in theory, what would be left for shareholders if everything were sold at the value stated in the accounts. A P/B below 1 means the market values the company at less than its own stated net assets.
This works well for banks and insurers, whose assets are mostly financial and therefore genuinely worth roughly what the books say. It works terribly for software, pharma, or anything whose value is brands, code and people, none of which appear on a balance sheet.
P/B = Market cap ÷ Book value of equityHow the three statements lock together
Profit flows from the income statement into the balance sheet as retained earnings, and the cash flow statement reconciles what was earned with what actually arrived.
For financial companies it is the primary valuation tool. For most others it is close to meaningless.
Calling an asset-light company 'expensive' because its P/B is 15. It has almost no book to speak of, and that is the point.
Related terms
See P/B ratio on a real company
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