The Price to Book Ratio, or P / B Ratio, is a financial ratio used to compare a company's Book Value to its current market price and is a key metric for value investors. This is calculated as the Current Price divided by the latest annual Book Value Per Share. This figure is computed from the latest available interim accounts.
This is a key metric for value investors, whereas growth investors typically believe that book value reveals very little about a company's prospects for future performance. Book Value denotes the portion of the company held by the shareholders; in other words, the company's assets less its total liabilities.
We exclude preferred shares in the calculation of Book Value. As with most ratios, it varies a fair amount by industry (companies that require more infrastructure capital will usually trade at P/B ratios much lower than, for example, consulting firms). P/B ratios are often used to compare banks, because most assets and liabilities of banks are constantly valued at market values. This version includes intangible assets and goodwill, unlike price to tangible book value.
A higher P/TB may be a sign that a company is overvalued.. However, Tangible Book value may be substantially different from market value, especially in high-tech, knowledge-based and other industries whose primary assets are not tangible.
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