Price-to-book (P/B) ratio is calculated by dividing the market capitalisation of a company by its book value. The book value of a company is the value of a company calculated by subtracting its liabilities from its assets.
The P/B ratio is a valuation multiple. It is used by investors to judge whether a company’s shares are overpriced, underpriced or priced just right.
If the shares of a company are underpriced, one might expect the share prices to increase. Similarly, if a company’s shares are overpriced, one might expect the share prices to decrease.
Trivia: Eugene Fama and Kenneth French are credited with being the inventors of the P/B ratio.
