The price-to-book ratio (P/B ratio) relates a company's market value to its book value, the equity on its balance sheet. A P/B ratio of 2 means that the market value is twice the equity on the balance sheet. Critivest calculates it from the market capitalization and the equity in the latest balance sheet.
PBRatio > 0 and PBRatio < 2
How is the P/B ratio calculated?
P/B ratio = market capitalization / book value
The book value is the equity attributable to the shareholders of the parent company, without minority interests. When market value and book value refer to the same shares, the P/B ratio equals the share price divided by book value per share. A positive P/B ratio below 1 means that the market value is below the equity on the balance sheet.
Tangible book value: the P/B ratio without goodwill
Tangible book value = book value − (intangible assets excluding goodwill) − goodwill
The price-to-tangible-book ratio (P/TB) divides the market capitalization by this value. It leaves out assets that are hard to sell or value, such as acquired brands, patents and goodwill from acquisitions.
How are the P/B ratio, P/E ratio and return on equity related?
The P/B ratio is the product of the P/E ratio and return on equity:
P/B ratio = P/E ratio × return on equity
This relationship holds when the calculations use the same earnings and equity figures. Express ROE as a decimal, such as 0.125 for 12.5%. With the same P/E ratio, the company with the higher ROE therefore has the higher P/B ratio.
What does a P/B ratio of 1.5 mean?
For the fictional Example Company:
| Market capitalization | EUR 12 billion |
|---|---|
| Equity (book value) | EUR 8 billion |
| P/B ratio | 12 / 8 = 1.5 |
| Intangible assets excluding goodwill | EUR 1 billion |
| Goodwill | EUR 2 billion |
| Tangible book value | 8 − 1 − 2 = EUR 5 billion |
| Price-to-tangible-book ratio | 12 / 5 = 2.4 |
The Example Company's market value is thus 1.5 times its equity but 2.4 times its tangible book value. With net income of EUR 1 billion, it has a P/E ratio of 12 and a return on equity of 12.5%: 12 × 0.125 = 1.5.
When is the P/B ratio of little use?
What does a negative P/B ratio mean?
A negative P/B ratio means that the equity attributable to the shareholders of the parent company is negative, for example after large losses or extensive share buybacks. Minority interests are not part of this equity. A negative multiple of book value is not meaningful. Tangible book value can be negative even with positive equity if goodwill and other intangible assets together exceed equity. The preset criteria therefore also check that each ratio is greater than 0.
Further limits of the P/B ratio
- The balance sheet shows many assets at cost less depreciation, not at market value. Internally generated brands and customer relationships are usually missing entirely, while software development costs may qualify for recognition as assets. For companies with few physical assets, such as software companies, the P/B ratio is therefore often high.
- Write-downs and share buybacks reduce equity and thus usually raise the P/B ratio.
- Market capitalization and balance sheet have different dates: the market value is current, the balance sheet is from the end of the latest quarter.
- Typical values differ widely between industries. For banks and insurers, the P/B ratio is widely used, as their balance sheets consist mostly of financial instruments.
- A low P/B ratio only means that the market value is low relative to equity. It says nothing about future developments.
Using the P/B ratio as your own criterion
The preset criterion “Price-to-book ratio less than 2” checks this condition:
PBRatio > 0 and PBRatio < 2The criterion “Price-to-tangible-book ratio less than 2” checks the same for tangible book value:
PTBRatio > 0 and PTBRatio < 2The Example Company meets the first criterion but not the second. You set the limit yourself; 2 is an example, not a recommendation.
Which balance sheet items does Critivest use for the P/B ratio?
The market capitalization is the latest stored market value. Equity, intangible assets and goodwill come from the latest balance sheet. If an item is missing, Critivest uses its most recent available value from the preceding three quarters. Amounts from the report are converted to the stock's currency.
Periods and missing values: Methodology.
Formula reference in Critivest
Name in conditions: PBRatio
PBRatio = MarketCapitalization / BookValuePrice to book ratio
Name in conditions: PTBRatio
PTBRatio = MarketCapitalization / TangibleBookValuePrice to tangible book value ratio
Name in conditions: BookValue
BookValue = TotalEquityTotal equity of the shareholders of the parent, excluding minority interest
Name in conditions: TangibleBookValue
TangibleBookValue = TotalEquity - IntangibleAssets - GoodwillTotal equity excluding minority interest, intangible assets and goodwill
Names used in conditions
MarketCapitalization- Market capitalization
BookValue- Total equity of the shareholders of the parent, excluding minority interest
TangibleBookValue- Total equity excluding minority interest, intangible assets and goodwill
TotalEquity- Balance sheet: Equity attributable to shareholders of the parent company
IntangibleAssets- Balance sheet: Intangible assets excluding goodwill
Goodwill- Balance sheet: Goodwill; may be estimated when reported together with other intangible assets
Related formulas
- P/E ratio (price-to-earnings ratio): The P/E ratio divides a company's market value by its earnings. Critivest calculates it from the market capitalization and the earnings of the last four quarters.
- Return on equity: Calculate and interpret return on equity (ROE) with a formula, a worked example, DuPont analysis and the limits of low or negative equity.
Sources
- P/B ratio, Wikipedia
- Market-Based Valuation: Price and Enterprise Value Multiples, CFA Institute: book value and valuation multiples
- IAS 38: Intangible Assets, IFRS Foundation: recognition of intangible assets and the distinction from goodwill
Last updated: November 4, 2026