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What Is the P/B Ratio (Price-to-Book Ratio)?

Q: Which is more important, P/B or P/E?

The two look from different angles. The P/E looks at the stock price 'relative to earnings,' and the P/B looks at it 'relative to net assets.' For a company with erratic earnings or a loss-making one, the P/E is unstable, so the P/B complements it; for a company with few assets that relies on growth, the P/E is more useful. Looking at both together is the standard.

Q: If the P/B is below 1, is it okay to buy?

It's not that simple. A low P/B is often for a reason—the market sees the future unfavorably. You have to first check 'why it's cheap,' not 'that it's cheap.' This article is a concept explanation, not a recommendation of any particular stock.

If a company closed its doors right now and sold off all its assets, how much would come back to shareholders? The P/B ratio compares the stock price with that 'book net assets.'

The P/B Formula and the Meaning of 'P/B of 1'

The P/B ratio (Price-to-Book Ratio) is a metric for seeing how many times the stock price is relative to the company's net assets (book value).

P/B = stock price ÷ book value per share (BPS)

For the whole company, it's the same as 'market capitalization ÷ shareholders' equity (net assets).' Here, net assets are 'assets − liabilities' on the balance sheet.

The reference point is 1.

- P/B = 1: the stock price is at exactly the level of book net assets - P/B > 1: the market values it above net assets (expecting future earnings, brand, etc.) - P/B < 1: the stock price is below book net assets (in theory 'cheaper than liquidation value,' but there's often a reason for it)

Is a Low P/B Unconditionally Undervalued?

If the P/B is below 1, it 'trades cheaper than its assets,' so it looks undervalued. But there's a trap.

If the market sees the company's future as bleak, or expects future losses that will shrink net assets, the P/B can stay low. In other words, there's often a reason it 'looks cheap.'

There's also a limitation in book value itself. Intangible value like brand, technology, and talent isn't well captured on the books, so IT and bio companies for which such assets are central inherently show high P/Bs. Conversely, companies with lots of factories and real estate tend to show low P/Bs.

So the P/B is more useful in industries where 'assets are clearly physical,' like banking, insurance, and manufacturing, and requires caution in interpretation in industries with a large share of intangible assets.

P/E and P/B Are a Pair

The P/B is more powerful when viewed together with the P/E and ROE than alone.

In fact, these three are connected. Roughly, the relationship 'P/B ≈ P/E × ROE' holds. In other words, a company that generates earnings well from its net assets (a high-ROE company) can justify a higher P/B.

So if 'the P/B is low but ROE is also low,' it may just be a company that doesn't earn money well, and if 'the P/B is low but ROE is consistently high,' it may be a signal worth another look. Of course, this too is a starting point for judgment, not a buy signal.

よくある質問

Q. Which is more important, P/B or P/E?