Price-to-book ratio

Book value is shareholders' equity as recorded on the balance sheet: total assets minus total liabilities. The price-to-book ratio divides the company's market capitalisation by that figure, or equivalently the share price by book value per share. A ratio of 1 means the market values the company at exactly its accounting net worth; above 1, investors value it at more than its recorded net assets; below 1, at less. Analysts often use tangible book value, which excludes goodwill and other intangible assets, for a more conservative measure.

Price-to-book is most meaningful for companies whose assets are mostly financial or tangible and carried at close to their real value, such as banks and insurers. It is much less useful for businesses whose main assets are brands, software, patents or skilled staff, because such internally developed intangible assets are often not recorded on the balance sheet at all, which makes their book value look small. A low price-to-book ratio can signal a bargain, but it can equally reflect a business earning poor returns on its assets, or assets that are overstated.