The price-book (PB) ratio is a value metric which defines the relationship between a stocks price and the underlying book value of the company. A higher PB indicates a larger expected future book-value growth.
The book value of a company is simply its assets minus its liabilities. A high PB could mean that a company is overvalued, a low PB could mean that a company is undervalued. PB is most useful in valuing companies with liquid assets such as finance, investment and banking firms. It is less useful for IP rich stocks such as those in the tech and pharmaceutical industry.
- We can compare a company’s PB to it’s industry to gauge how expensive the company is relative to that industry for an apples-to-apples comparison.
- We can also compare a company’s PB to its historical PB to gauge if it is cheaper vs. history.