The Two Methods to Calculate P/B Ratio in the Calculator:
Method 1: Market Capitalization / Book Value of Equity
The first method to calculate the Price-to-Book (P/B) ratio involves using Market Capitalization and Book Value of Equity. The formula is:
P/B Ratio = Market Capitalization / Book Value of Equity
Where:
- Market Capitalization: The total market value of a company’s outstanding shares. We calculate it by multiplying the current stock price by the total number of outstanding shares.
- Book Value of Equity: This is the net asset value of a company as recorded on the balance sheet. It represents the total value of the company’s assets that shareholders would theoretically receive if the company were liquidated.
The P/B ratio measures a company’s market value relative to its book value. If the P/B ratio is less than 1, it might suggest that the stock is undervalued relative to its book value. Conversely, a ratio higher than 1 could indicate overvaluation. However, this varies by industry.
Method 2: Stock Price / Book Value Per Share
The second method to calculate the Price-to-Book (P/B) ratio is:
P/B Ratio = Stock Price / Book Value Per Share
Where:
- Stock Price: The current trading price of a single share of the company’s stock. It reflects the market’s current valuation of a single share.
- Book Value Per Share: The book value of equity divided by the number of outstanding shares. It represents the amount of equity available to shareholders on a per-share basis.
The P/B ratio, calculated this way, provides a more granular view than the first method.
Related Calculator: Book Value Per Share (BVPS) Calculator.
P/B Ratio Calculation Example
Let’s illustrate how to use both methods to calculate the Price-to-Book (P/B) ratio with a hypothetical company XYZ Corp. Let’s say the book value of this company’s equity is $3 billion. Its current stock price is $50 per share, and it has 100 million shares outstanding.
Using the method 1:
- Market Capitalization = $50 (stock price per share) × 100,000,000 (shares) = $5 billion
- Book Value of Equity = $3 billion
- P/B Ratio = $5 billion (market capitalization) / $3 billion (book value of equity) ≈ 1.67
Using the method 2:
- Stock Price = $50 per share
- Book Value Per Share = $3 billion (book value) / 100 million (shares) = $30 per share
- P/B Ratio = $50 (stock price per share) / $30 (book value per share) ≈ 1.67
The two methods should finally derive the same result. A P/B ratio of 1.67 indicates that the market values XYZ Corp at 1.67 times its book value. Comparing the P/B ratio with industry averages or competitors could offer you a more fair valuation of this company.
Our P/B ratio calculator is aimed to offer insights into how the market values a company relative to its book value. While a useful tool, remember to consider them as part of a broader analysis, including other financial metrics and qualitative factors.
