The price to book ratio is also known as the P/B ratio or market to book ratio. It is the financial valuation tool that is used to evaluate the stock of the company, whether it is overvalued or undervalued, by comparing the all outstanding share price with the company’s net assets.
In other words for the measuring of difference between book value and total share price of the company, this calculation is used.
What is the difference between Book Value and Market Value?
The difference between the book value of the company and the market value of the company is demonstrated by this comparison.
The current stock price of all outstanding shares of the company is called the market value.
Due to this price, the market considered the company as a worthy company, whereas book value shows the net assets of the company on the balance sheet.
The formula of Price to Book Ratio
The price to book ratio formula can be calculated by dividing the market price per share by the book value per share.
Price to book ratio = Market price per share/Book value per share
The current stock of the company which company is being trading in the open market is called market price per share. Whereas book value per share is complicated. We can get book value per share by the difference of total liabilities and total assets and divide the result of this by the total number of outstanding shares on that date.
The above equation rephases by most investors to form the book to market ratio formula by the division of the total book value of the company by the total market value.
Market to Book Ratio = Total Book Value/ Total Market Value
PB ratio included the individual share whereas the MB ratio formula compares values on a company-wide basis.
Price to Book Ratio Analysis
Investors used the PB ratio to find that whether the company is overpriced or underpriced. If the ratio of the company is above 1 it means that investors want to invest more as compared to the total assets or worth of the company. It means that for the future projection company is healthy.
If the PB ratio of the company is less than 1 then the company needs to sell its assets below the worth of the assets of the company. So the company is undervalued because of some reasons.
Investors take interest in those companies which have overvalued prices. This calculation does not take the dividend into consideration. Investors invest the share of the company which will regularly issue a dividend.
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