What is book value?
In the balance sheet, the company lists everything it owns (assets) and everything it owes (liabilities). The difference is shareholders' equity, which we call book value. Divide it by the number of shares and you get book value per share. In consolidated statements, the more precise figure is the equity attributable to ordinary shareholders, divided by shares outstanding. The example here is simplified and assumes no preferred shares and no non-controlling interests.
The price-to-book ratio = share price ÷ book value per share. In other words, how many times the net assets in the books the market is paying.
A worked example
A P/B of 1.5 means the market pays one and a half pounds for every pound of net assets in the books. At a price of EGP 4, the ratio would be 0.8, meaning the price is below book value.
Where is it most useful?
Book value reflects tangible and financial assets reasonably well, but only partly shows things like software, a brand or a team's know-how. That is why this ratio gets more attention for companies whose assets are financial.
And like any multiple, comparing it with companies in the same sector says far more than the number alone.
Read a real stock's book value
Open any stock page, find book value per share next to the price, and work out the ratio yourself.
Check yourself
1. Equity 200M, 50M shares, price EGP 6. What is P/B?
2. Why is P/B less useful for a software company?
Summary
- Book value = assets minus liabilities, divided by the number of shares.
- P/B = share price ÷ book value per share.
- Below 1 does not mean a bargain, and the ratio helps most when assets are financial.