Price to Book Value (PB) Ratio

Price to Book Value Ratio is a type of Profitability Ratio that determines the relative value of the market price of a share to its book value. This ratio compares the Market value of a company with its Book Value.
Price to Book Value (PB) Ratio = Market Price per Share / Book Value per Share
Where,
  • Market Price per Share is the current market price of each share of the company.
  • And Book Value Per Share = (Total Assets–Total Liabilities) / Total Number of Shares.

PB Ratio can also be calculated as:

  • Price to Book Value (PB) Ratio = Market Capitalization / Book Value
Where,
  • Market Capitalization = Current Market Price per Share * Total Shares of Company.
  • And Book Value = Total Assets–Total Liabilities

Significance and Interpretation

  • PB Ratio is a significant ratio that compares the value of a company in the market relative to its Book Value.
    • PB Ratio = 1: This implies that Market Capitalization, as well as Book Value of a company, is the same, which is the ideal scenario for a company.
    • PB Ratio > 1: This implies that the Market Value of a Company is more than its own Book Value, this happens when the market is confident about the high performance and growth of the company in the future.
    • PB Ratio < 1: This implies that the Market value of a company is less than its own Book Value, this happens when the performance of the company is not expected to be good.

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the PB Ratio for M/S XYZ Ltd.
Particulars Amount (in Rs.)
Equity Share Capital @ Rs 10.00 each 5000000.00
Total Assets 5000000.00
Total Liabilities 2500000.00
Market Price per Share 12.00
  • Solution:
  • Total Number of Common Equity = 5000000 / 10 = 500000
  • Book Value of all Shares = Total Assets – Total Liabilities = Rs. 2500000.00
  • Book Value per Share = Book Value of all Shares / Total Number of Common Equity = Rs. 5
  • PB Ratio = Market Price per Share / Book Value per Share = 12 / 5
  • PB Ratio = 12/5 or 2.4
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