ruly Price to book: comparing the share price with book value
Definition of the price to book ratio, its formula, where to find equity in an annual report, usual thresholds by profile, and the traps of intangible assets left off the books.
Published
Definition
The price to book ratio compares the share price with the book value of equity per share. It shows how much the market pays for each euro of equity recorded on the balance sheet. A ratio of 1 means the company is priced at its book value.
Formula
Price to book = share price / (equity attributable to the parent / number of shares outstanding)
Where to find it in an annual report
Equity attributable to the parent is on the liabilities side of the consolidated balance sheet. The number of shares outstanding, excluding treasury shares, appears in the note on share capital or in the part of the report about the share. Some companies publish book value per share directly.
Common thresholds
Value: 1.5 at most for green, up to 2.5 for orange. For a bank or an insurer, a ratio close to 1 is common and is read together with return on equity. For a software or services company, a ratio of 5 to 10 is frequent and says little.
In the preset strategies
| Preset strategy | Criterion met | To monitor | Criterion not met |
|---|---|---|---|
| Value Price / book value | ≤ 1.5 | 1.5 to 2.5 | > 2.5 |
Pitfalls
- Intangible assets built in-house (brands, software, know-how) almost never appear on the balance sheet: a very profitable company always looks expensive on this ratio.
- Large share buybacks or past losses reduce equity and inflate the ratio.
- Goodwill inflates book value without being something the company could resell: some analysts remove it and calculate tangible book value.
- A low ratio can reflect assets overstated on the balance sheet, which will be written down later.
Where it does not apply
- Software companies, service firms and brands: most of their value is intangible and off the balance sheet.
- Companies with negative equity, after large buybacks or losses: the ratio no longer makes sense.
A worked example
A fictitious company, called Company E here, reports €800 million of equity attributable to the parent for 40 million shares outstanding. Its book value per share is 800 / 40 = €20. With a share price of €30, its price to book ratio is 30 / 20 = 1.5.
What to read it with
The ratio makes sense when compared with return on equity. A company earning 20% a year on its equity justifies a much higher ratio than one earning 5%. That is also the idea behind the P/E × price to book criterion, which combines this ratio with the P/E.
Sources
- Annual reports of listed companies (consolidated balance sheet, note on share capital)
- Benjamin Graham, “The Intelligent Investor”