Price/Book Ratio (P/B)

What is it? An indicator of whether a stock is fairly valued. The price-book ratio compares a stocks market value (or current price) to its per share book value (total assets minus intangible assets and total liabilities). In evaluating stocks, comparing price-book ratios often works well in situations where price-earnings ratios do not because P/B is stable over time and is always a positive number. Price-book ratios are best used for comparisons within an industry rather than between industries. Some industry sectors contain only companies with a high (or low) ratio. Applied to mutual funds, the P/B ratio is the weighted average of all the stocks in the mutual funds portfolio. Larger holdings have a greater influence on a funds overall P/B. Its a good idea to look beyond the P/B ratio because the asset values can be understated on a companys balance sheet. Real estate carried on the books for a number of years, for example, is often listed at the purchase price rather than the usually much higher market price. When that happens, the book value is actually higher than reported, and the P/B ratio will be inaccurate. Book value also does not include such intangibles as goodwill, copyrights, and patents.

Added By: Brady

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