Answered By: IESE Library
Last Updated: May 27, 2022     Views: 91

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.

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