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Price-to-book ratio (P/B ratio) is a financial ratio used to compare a company's market value to its book value.
What is Price-to-Book Ratio (P/B Ratio)?
The Price-to-book ratio (P/B ratio) is a financial metric that compares a company's market capitalization (the total value of its outstanding shares) with its book value (the value of its assets minus its liabilities). It provides investors with an insight into how much the market is willing to pay for a company's assets compared to their actual value.
The P/B ratio is calculated by dividing the current market price per share by the book value per share. This ratio is commonly used by investors to assess the relative value of a company's stock and can be helpful in determining whether the stock is overvalued or undervalued.
The P/B ratio is often used by investors as an indicator of whether a stock is overvalued or undervalued. A P/B ratio of less than 1 can indicate that a stock is undervalued, while a ratio of greater than 1 can suggest that the stock is overvalued.
Key Takeaways
- The P/B ratio is a financial metric that compares a company's market value to its book value. It is calculated by dividing the current market price per share by the book value per share.
- The P/B ratio provides investors with an indication of how much the market is willing to pay for a company's assets compared to their actual value. A high P/B ratio suggests that the market is valuing the company's assets more than its book value, while a low P/B ratio suggests the opposite.
- Investors use the P/B ratio to identify undervalued or overvalued stocks. A P/B ratio of less than 1 may indicate that a stock is undervalued, while a ratio of more than 1 may suggest that the stock is overvalued.
Example of Price-to-Book Ratio (P/B Ratio)
A company's stock is currently trading at $50 per share, and its book value per share is $20. To calculate the P/B ratio, we divide the market price per share by the book value per share:
P/B ratio = Market price per share / Book value per share
P/B ratio = $50 / $20
P/B ratio = 2.5
In this example, the P/B ratio is 2.5, which means that the market is currently valuing the company's assets at 2.5 times their book value.
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