Price-to-book ratio

Price-to-book divides the share price by accounting book value per share, where book value is shareholder equity (assets minus liabilities) on the balance sheet. P/B is most informative for businesses where the balance sheet is the business — banks, insurers, REITs, asset managers, capital-equipment leasing — because for those firms, book equity is a rough proxy for the replacement cost of the asset base. A bank trading at 0.7x book is being told by the market that some of its loans are overstated; a bank at 2.0x book is one whose franchise generates returns on equity well above its cost of equity. For asset-light businesses — software, brands, services — P/B is essentially noise, because the most valuable assets (code, brand equity, customer relationships) are not capitalized on the balance sheet at all. We always pair P/B with return on equity: a P/B of 2x is fairly priced for an ROE of 20% and expensive for an ROE of 8%, because the multiple should equal the ROE divided by the cost of equity in steady state. The Justified P/B framework formalizes this: P/B = (ROE − g) / (Ke − g), where g is the sustainable growth rate. Tangible book value (book minus goodwill and intangibles) is a more conservative variant we prefer when goodwill from past acquisitions is large or impaired.