The financial metric known as the price to book ratio measures the market price per share of common stock of a company relative to the book value of each share. The price to book ratio is used to determine if a company's stock price is undervalued.
The price to book ratio can be calculated two ways:
Method 1:
Price to Book = Market Price per Share / Book Value per Share
Where:
Method 2:
Market to Book = Total Market Capitalization / Total Book Value
Where:
Generally, higher price to book ratios are preferred, since they indicate a larger market premium is being paid by investors relative to the net book value of the assets owned by the company. When this ratio falls below 1.0, analysts and investors should be warned that a problem does exist with the company, or the market is not valuing it correctly, since a share of stock is worth more than it is selling for on the market.
The price to book ratio uses information from the balance sheet as well as the current market price of the company's common stock. When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.
Company A's current market price per share of common stock is $88.24. Company A's balance sheet indicates total owner's equity (shareholder's equity) of $15,420,000 and no preferred shares issued. Company A has 693,000 shares of common stock outstanding. The price to book ratio of Company A would be:
= $88.24 / (($15,420,000 - $0) / 693,000)
= $88.24 / ($15,420,000 / 693,000)
= $88.24 / $22.22, or 3.97
balance sheet, owner's equity, preferred stock, market capitalization, book value
Explore Investing Further
Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
*Plus500 disclaimer: Beginners are advised to use the demo account and the Trading academy to gain experience before trading with real capital due to the risks involved
Looking for a way to avoid swap fees while trading forex?
By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
The table below lists the best stock picks under $2, listed on public exchanges.
The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
This section will highlight the best EV-trading penny stocks available in the United States.
The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.