# Price to Book Value Ratio | Stock Market Terms 3 | PB Ratio

Hello friends. In this blog, we discuss various financial topics. That is why we have launched the ‘Stock Market Terms‘ series. This is the third post of that series. The topic of our discussion in today’s post is Price to Book Value Ratio or P/B Ratio. In the previous posts, we discussed “Market Capitalization” & “Enterprise Value”. Click here to read those articles.

Contents

## What is Book Value

Book value is derived after deducting the liabilities of a company from its tangible assets. Hence,

Book Value = Tangible Asset of a Company – Liabilities of a Company

## What is Book Value Per Share

Book value per share could be described as the amount shareholder of the company gets in respect to each share if it gets liquidated completely. Another way to say, Book value is the proportionate asset it has for each stock of that company.  To understand this in a simple way, let’s take an example.

As of 15.02.22, the book value of Tata Motor is Rs. 135. This means, if Tata Motors gets liquidated today, an investor will get Rs. 135 for each share he/she owns in the company. However, this works only in theory because the process of liquidation of a company is very complex and lengthy. So, at the time, the company’s liquidation process proceeds, the value of its assets keeps decreasing, and henceforth book value of the company decreases.

## What is Price to Book Value Ratio (PB Ratio)

Price to Book Value Ratio or PB Ratio is the comparison between the Current Market Price of a Stock with the Book value of the stock. Let’s take an example and understand this.

As of 15.02.22, the Current Market Price of a Stock of Tata Motor is 504, and the book value of Tata Motor is Rs. 135. Hence, the Price to Book Value Ratio or PB Ratio is = (504/135) = 3.73.

This means, if an investor buys one share of Tata Motor today, he/she is giving Rs. 3.73 for the asset the company has now equivalent to Rs. 1.

Ideally, the P/B Ratio of 1 is considered fairly valued whereas the P/B of below 1 is considered as under-valued.

## Applications of PB Ratio

PB Ratio can be used in asset-heavy industries, like Real Estate, industries having heavy machinery, mining, etc. whereas it cannot be used in asset-light industries like IT. This is because, Book Value of a company becomes important where a good amount of tangible assets can be liquidated and in return, the shareholder can get back the amount of book value. In an IT company, the assets are mostly intangible, for example – software, technology, brand, etc. These things cannot be liquidated. However, PB Ratio can be used in the case of the Banking Sector, NBFCs as they have huge cash in hand as liquid assets. Another factor that matters much in this case is the type of assets. While checking the PB Ratio of a company, an investor should check whether the assets of the company are depreciating or appreciating.

### Conclusion

All the financial ratios have different uses. PB Ratio also has some specific uses. It can be used for asset-heavy industries. However, this should not be used as the only checklist for investing. Other ratios and factors must be analyzed while investing in a company.