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.
$$Price\quad to\quad Book\quad Value(PB)\quad Ratio=$$$$\frac { Market\quad Price\quad per\quad Share }{ Book\quad Value\quad per\quad Share } $$ Market Price per Share is the current market price of each share of the company.
Where,
And Book Value Per Share = (Total Assets–Total Liabilities) / Total Number of Shares.
$$Price\quad to\quad Book\quad Value(PB)\quad Ratio=$$$$\frac { Market\quad Price\quad per\quad Share }{ Book\quad Value\quad per\quad Share } $$ Market Price per Share is the current market price of each share of the company.
Where,
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
- 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
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
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
PB Ratio = Market Price per Share / Book Value per Share
⇨ 12 / 5
PB Ratio = 12/5 or 2.4
PB Ratio = 12/5 or 2.4
