Investment word of the day: Price-to-book ratio — what is P/B ratio and why is it important?

Investment word of the day: There are several measures to understand whether a stock aligns with your investment or financial goals. One such metric is the price-to-book ratio or P/B ratio, which helps determine whether a stock is overvalued or undervalued.

What is the P/B ratio?

The price-to-book value ratio, also known as the price-equity ratio, shows the relationship between the market value of a company per share and its book value, which is the difference between assets and liabilities mentioned in the balance sheet.

Investors use the P/B ratio to understand whether the stocks of a company are overvalued or undervalued.

How to calculate the P/B ratio?

The P/B ratio can be calculated by dividing the market price of a share by the book value per share. The market price per share is the current trading price of the company’s stock, while the book value per share is the company’s book value divided by the number of outstanding shares.

For example, If a company has a market price of ₹60 per share, a total book value of ₹20 crore, and one crore shares outstanding,

Book value per share = ₹20 crore ÷ 1 crore shares = ₹20

P/B ratio = ₹60 ÷ ₹20 = 3

Hence, the market valuation of this company is five times the book value.

Why P/B ratio is important?

“The P/B ratio is a key tool for Indian investors in 2025 because it is one of the most effective ways to analyse a given stock’s market value in comparison with its net asset value,” according to Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.

What is a good P/B ratio?

A good P/B ratio may differ from sector to sector.

“A ratio goes as high as three for those optimal industries because of tangible assets and investor optimism about future earnings. More or less, FMCG is an industry in India which deems the P/B ratios of one and two to be fair; on the other side, certain fast-growing industries attribute P/B ratios above three to tangible assets plus optimistic expectations regarding future earnings,” Maurya said.

The high P/B ratio is mainly used for appraisal of banking, real estate, and manufacturing industries, which have high tangible assets because material nature industries also have a direct impact on their business, according to Bharat Mundada, Mundada Finserve Pvt Ltd.

“The deemed value of each share is higher than its book value implies strong expectations of company’s performance, which justifies higher P/B ratio by stockholder’s expectations but some low ratio is suggested to mean underestimation. For instance, a prudent investor with existing positive expectations would find the P/B ratio lower than three indicates strong future enhancement and while greater than three could be flagged as over expectation,” Mundada said.

Most industries have P/B ratios between 1 and 3. However, this metric is not enough to determine a company’s financial performance.

“Also, in industries that have high intangible assets like technology and pharmaceuticals, relying on the P/B ratio could be misleading,” he added.