Glossary

The Price-to-Book ratio (P/B ratio) is a financial valuation metric used to compare a company's market price 🏷️ to its book value.

It is calculated by dividing the company's market capitalisation (stock price multiplied by the number of outstanding shares) by its book value (total assets minus total liabilities). A low P/B ratio may indicate that the stock is undervalued, while a high ratio may suggest overvaluation.

For example, if a company has a market capitalisation of $10 million and a book value of $5 million, its P/B ratio would be 2 ($10 million / $5 million).

Fun fact: The P/B ratio is particularly useful when analysing companies in the financial sector 🏦, such as banks and insurance companies, as their balance sheets often consist of financial assets that have a relatively transparent market value. However, it might not be as useful for companies with significant intangible assets, like technology firms.