Price to book ratio

A price to book ratio, or price-to-book ratio, often expressed as a P/B ratio, is used to compare a company's current market price to its book value. It is calculated by dividing the company's current share price by its book value per share.

One way to understand book value is as follows: when a business is liquidated, the book value is what may be left over for the owners after all the debts are paid. Paying only a P/B of 1 means the investor will get all his investment back, assuming assets can be resold at their book value.

Shares of capital intensive industries trade at lower P/B ratios because they generate lower earnings per dollar of assets. Business depending on human capital will generate higher earnings per dollar of assets, so will trade at higher P/B ratios. Value stocks tend to have low P/B ratios, and growth stocks high ones.