How to use the price-to-book calculator
The P/B ratio tool compares the price with the balance sheet:
- Choose how to enter book value. Per share if you have book value per share; total equity and shares if you are working from the balance sheet.
- Enter the share price.
- Enter book value. Use common shareholders’ equity, without preferred stock or minority interests. With totals, enter equity in millions and the share count in millions.
- Add goodwill and intangibles (optional) to get the price-to-tangible-book ratio.
The Justified P/B tool asks a different question: given the company’s return on equity, growth rate and the return investors require, what P/B does it deserve?
The formulas
P/B = Share price ÷ Book value per share
P/TBV = Share price ÷ (Book value per share − Goodwill & intangibles per share)Book value is assets minus liabilities from the latest balance sheet. Both ratios are shown only when the book value used is positive.
A worked example
Company A’s shares trade at $45. Its balance sheet shows book value of $30 a share, of which $8 is goodwill and other intangibles from past acquisitions.
The P/B ratio is 1.50×: investors pay $15.00 a share above the net assets on the books. Tangible book value is $22.00 a share, so the price-to-tangible-book ratio is 2.05×.
Company A earns a 15% return on equity, can grow 4% a year, and investors require 10%. The justified P/B is 1.83×, a justified price of $55.00 and an upside of 22.2% from the current price. Put the other way, the current price implies a sustainable ROE of 13.0%.
How to read P/B
A P/B ratio tells you how much the market thinks each dollar of net assets is worth in the company’s hands. Typical levels vary widely by industry:
- Around or below 1× is common for banks, insurers and capital-heavy businesses earning modest returns. The market values the assets at little more than their accounting value.
- 1× to 3× fits many established industrial and consumer companies.
- Well above 3× is typical of asset-light companies with strong brands, software or patents, whose value comes from assets the balance sheet does not record.
A stock at $18 with book value of $24 trades at 0.75×. Before calling that cheap, ask why: loans that may go bad, inventory that may not sell, or a business that earns less than its cost of capital.
Why return on equity drives P/B
The justified P/B formula shows the key relationship: a company deserves to trade above book only if it earns more on its equity than investors require. With growth at 4% and a required return of 10%:
| Return on equity | Justified P/B |
|---|---|
| 8% | 0.67× |
| 10% | 1.00× |
| 15% | 1.83× |
| 20% | 2.67× |
| 25% | 3.50× |
When ROE equals the required return, the justified P/B is exactly 1, whatever the growth rate. Below it, growth makes things worse: reinvesting at a return below the cost of capital destroys value. That is why a low P/B combined with a low ROE is usually fair, while a low P/B with a high, durable ROE deserves a closer look. Our ROE calculator breaks the return down further.
What this calculator does not include
- Market value of assets. Book value records most assets at historical cost less depreciation. Land bought decades ago may be worth far more; specialized equipment may be worth far less.
- Assets that are not on the balance sheet. Internally built brands, software and research are mostly expensed, so they do not appear in book value.
- Buybacks. Repurchasing shares above book value shrinks equity and pushes P/B up without any change in the business.
- Changing ROE. The justified P/B assumes one ROE forever. Use a normal-year level, not a peak.