TL;DR: Price to book, or P/B, divides price per share by book value per share. At a price of $45 and book value per share of $30, the ratio is 1.5, since $45 divided by $30 equals 1.5. Above 1, the market pays more than the accounting equity behind each share; below 1, it pays less. Neither reading is a verdict. A premium is usually payment for returns on equity above the cost of that equity, and a discount is usually doubt about the assets or the returns. The ratio is a question about the relationship between profitability and asset value, and it is at its best in financial companies, where book value is closest to reality.
Key Takeaways
- The economic logic: a company earning a high return on equity deserves a higher P/B than one earning a low return on the same equity, because each dollar of book produces more profit.
- Tangible book, equity minus intangibles and goodwill, gives a stricter denominator. In the worked example below, a price to tangible book of 1.8 stands beside the headline P/B of 1.5 for the same stock.
- Below book value is a research assignment, not a bargain tag: the market may be pricing asset write downs, losses ahead, or governance it does not trust.
- Compare P/B within industries, chiefly financials and asset heavy sectors. Across the whole market the ratio mostly measures how intangible each business model is.
- Graham's combined discipline used P/B alongside P/E, capped at 1.5 times book in his defensive rules, the origin of the factor inside the Graham number.
A worked example, including the tangible variant
Take a hypothetical bank with a share price of $45 and book value per share of $30, giving a P/B of 1.5. Its balance sheet carries $3 billion of equity for 100 million shares, which checks: $3 billion divided by 100 million equals $30. Inside that equity sit $500 million of goodwill and other intangibles from past acquisitions. Tangible equity is $3 billion minus $500 million, which is $2.5 billion, or $25 per share. Price to tangible book is $45 divided by $25, which equals 1.8. Same stock, same day, two ratios 0.3 apart, and the gap is arithmetic: the same $45 price divided by two different denominators. It does not by itself isolate what the market pays for the acquisition created intangibles. Bank analysts quote the tangible figure because a failed bank's goodwill is worth nothing to anyone; ongoing earnings power might justify the premium anyway, but the stricter denominator keeps the question visible. The ingredients for both denominators come from the reading method in book value per share explained.
What justifies a premium to book?
Returns. Imagine two banks with identical $30 book value per share. One earns a 15 percent return on equity, the other 6 percent, against a cost of equity near 10 percent. The first creates value with every retained dollar, compounding book at a rate above its cost; the second destroys value slowly while reporting profits. Rational prices separate them widely on P/B, several times book for the first, below book for the second, without either being mispriced. This is why sorting banks by P/B alone assembles a portfolio of low return institutions. The ratio must be read as price per unit of book, judged against the profit each unit produces, which is the same discipline as reading P/E with growth rather than P/E alone.
Growth in book value per share is the bridge between the two ratios. A company compounding book at 12 percent a year while paying dividends is manufacturing the denominator's growth, and a premium price today can be amortized by that compounding. When you pay 1.5 times book for a compounder, you are forecasting that the book, and the earnings on it, will grow into your price. Write that forecast down when you make it; P/B purchases are implicit forecasts and deserve the same written form as a DCF assumption.
When does a discount to book deserve your attention?
In three situations. Cyclical troughs, where depressed earnings have convinced the market that asset values are impaired when they are merely idle. Post crisis financials, where the assets have been marked under regulatory pressure and the surviving equity is real. And neglected asset heavy companies whose books carry property or investments at old costs below current value, the one case where book understates rather than overstates. In each situation the research task is identical: audit the assets yourself. Read the loan book quality, the investment portfolio marks, the property schedules. The discount is the market's summary of that audit performed by others; buying the discount means betting your audit beats theirs, which is sometimes true and should be a deliberate bet, recorded with the stock research checklist.
FAQ
What is a good price to book ratio? There is no universal good figure. For banks, ratios around and above 1 have historically accompanied adequate returns on equity, while below 1 has accompanied returns under the cost of equity. Judge the ratio against the company's return on equity and its own history, never against a market wide rule.
Why do software companies trade at enormous P/B ratios? Because their productive assets are intangible and largely absent from the balance sheet, making the denominator small and the ratio uninformative. For such companies the ratio measures accounting convention more than valuation, and earnings or cash flow ratios carry the analysis.
Is price to book or price to tangible book better? For financial companies, tangible book is the more conservative and usually more informative denominator, because goodwill cannot be sold to meet obligations. For ongoing value creation, both are inputs; the difference between them quantifies how much of the equity is acquisition residue.
Can P/B be negative? When book value per share is negative, after losses or very large buybacks, the ratio becomes negative and meaningless for ranking, like a negative P/E. The correct response is to retire the ratio for that company and analyze the balance sheet directly.
Sources
- Investor.gov (U.S. Securities and Exchange Commission), investor education material on valuation ratios and balance sheets, accessed October 2026.
- Benjamin Graham, The Intelligent Investor, for the original combined P/E and price to book discipline.
- Every worked example in this post was computed directly from the stated inputs shown in the text.
Educational content, not financial advice. Any worked example uses hypothetical, illustrative figures chosen for round numbers. It is not a projection of any security's returns and not a recommendation to buy or sell any security.
