Price/Book Ratio

Price/Book (P/B) ratio shows a relationship between the stock market value of the company and the book value. Book value of a company is its net worth (or net equity), it's what a company would fetch if it was liquidated today.

Book Value Per Share = Total Shareholders Equity / Shares Outstanding

P/B = Stock Price / Book Value Per Share = Market Capitalization / Total Shareholder Equity

P/B ratio is very important when evaluating companies, but like any other ratio it must be approached carefully and keep in perspective other factors such as: industry average P/B, ROE of the company, etc. Lowest P/B ratios can be expected in capital-intensive industries such as utilities and retail, while higher P/B ratios will be found at companies that have significant intangible assets that book value doesn't take into account such as pharmaceuticals, biotech, technological and consumer products companies. Also, if a company consistently earns a high ROE (Return on Equity = Net Income / Total Equity), it can commend a higher P/B ratio.