What is price-to-book?
Take all of a company’s liabilities (loans, money owed to suppliers and so on) away from all its assets, and what is left belongs to the shareholders. This is shareholders’ equity, net assets or book value. Divide it by the number of shares and you get book value per share, usually called “net asset value per share” or NAV per share in Bangladeshi financial reports.
P/B ratio = market price per share ÷ book value per share. A P/B of 2 means the market is paying twice the net assets on the books for each share. A P/B of 0.8 means the market price is below even the value on paper.
Say Mr Rafiq runs a grocery shop. Its stock, fridge and cash add up to Tk 10 lakh in assets, and he owes the wholesaler Tk 4 lakh. On the books the shop is worth Tk 6 lakh. If someone offers Tk 9 lakh for the whole shop, they are paying one and a half times book value (a P/B of 1.5), because they believe the regular customers and the location are worth something that is not written in the books. The numbers are only an example.
Why it matters to an investor
- To compare the price with the assets: it shows at a glance how far the share price sits above or below the company’s net assets.
- It works for loss-making companies too: with no profit there is no meaningful P/E, but P/B can still be worked out as long as book value is positive.
- To read the market’s expectations: a high P/B usually means the market expects the company to earn well on its net assets. This ties closely to return on equity (ROE).
- To keep face value, book value and market price apart: in Bangladesh a share’s face value is usually Tk 10, but its book value and market price can be very different from that.
What book value includes, and what it misses
Book value is a figure set by accounting rules, not what the assets would fetch if sold. Land, buildings and machines are often carried at what they cost years ago, less depreciation. And stock that will never sell, or money that will never be collected, can stay on the books as assets if it is not written off in time.
Much of what makes a business strong never appears on the books: its brand, skilled staff, customer trust, software it built itself. So companies like these can naturally show a high P/B.
Where it helps more, and where less
- It helps more where assets are mainly financial or physical and can be valued fairly well, such as banks, finance companies, insurers or asset-heavy businesses. Even here, if loan quality is poor, assets on the books can look bigger than they really are.
- It helps less for service, brand or technology businesses, where the real value lies off the books.
- Comparing P/B across industries misleads. Compare within the same kind of business, and against the company’s own past.
What a P/B below 1 means
A P/B below 1 means the market is paying less than the value on the books. There are two kinds of reason: either the market is undervaluing the company, or it believes the assets are not really worth that much, or that the company earns almost nothing from them. P/B alone does not tell you which; for that you need the balance sheet, the profit history and ROE.
Worked example
- Say a made-up company, “Rupsha Foods Ltd”, has total assets of Tk 500 crore and total liabilities of Tk 300 crore. Book value = 500 − 300 = Tk 200 crore.
- There are 10 crore shares, each with a face value of Tk 10. Book value per share = 200 crore ÷ 10 crore = Tk 20.
- If the share trades at Tk 30, P/B = 30 ÷ 20 = 1.5. If the price falls to Tk 16, P/B = 0.8.
Result: one share, three different “values”: face value Tk 10, book value Tk 20, market price Tk 30 or Tk 16. Whether a P/B of 0.8 is a bargain or a warning depends on what the assets are really worth and how much they earn. The numbers are only an example.
Common mistakes
- Assuming a P/B below 1 is automatically cheap. Often the price is low because the assets or their earnings are weak.
- Treating book value as what the assets would sell for. Value on paper and sale value are not the same.
- Mixing up face value, book value and market price.
- Comparing P/B side by side across very different industries.
P/B tells you how many times its net assets on paper the market is paying; but you can’t judge cheap or dear without checking how real that book value is and how much it earns.