Answered By: IESE Library Last Updated: Apr 21, 2016 Views: 9
Price-to-Book (P/B) ratio is Market Value of Equity (Stock Price)/Book Value of Equity. P/B ratios are sometimes called Market-to-Book ratios. Similar to P/E ratios, the higher the price-to-book ratio is the higher the premium is that investors are willing to pay for the stock.
Lower price to book ratios tend to indicate that a stock is:
- undervalued or
- there are some inherent problems with the company.
Analysts often classify firms with:
- Low P/B ratios as value stocks.
- High P/B ratios as growth stocks.
Source:: Berk, J., & DeMarzo, P. (2007). Chapter 2: Introduction to financial statement analysis - 2.2 the balance sheet (market-to-book). Corporate finance (1st. ed., pp. 25). Boston, MA: Pearson Education, Inc.
Book value can be calculated using Compustat North America, accessed via WRDS. You need to obtain your WRDS account.