The price to book ratio calculator (also called price to book value or PB ratio) is a fast tool that can show us if a company's stock is undervalued. In this article, we will first review what is the book value of equity because that will allow us to understand book value per share and tangible book value per share. Then, by exploring the formula, we will compare book value vs. market value. Finally, we will see how to calculate the price-to-book value ratio and apply it to a real example.

What is the book value of equity?

We should start with a simple definition: " Book value is the accounting value of all the company's assets minus all the liabilities". In other words, it is the economic value of all the belongings of the company if we sell them after paying all kinds of debts (interest-bearing or non-interest-bearing).

As per the fundamental accounting equation, we would have the following:

Total equity = Total assets - Total liabilities

However, Total equity is not the book value that matters for stockholders. Items such as minority interest could make a difference. Consequently, it is better to go directly to the equity side of the balance sheet. There, we will find Total stockholder's equity, which is, as the name says, all that is in stockholder possession, including common stockholders and preferred stockholders.

It is worth mentioning that the asset value recorded in the balance sheet is discounted by its depreciation period by period; thus, we should expect a decreasing equity value over time. That can happen; however, in successful companies, when the return on assets is high, constant, and stable, the depreciation effect is offset by the cash retained from the company. Such cash comes from the free cash flow.

To learn more about free cash flow, visit our Free cash flow calculator.

What is tangible book value

When we mentioned that book value represents assets' economic value if we pay all financial claims, we did not talk about non-physical assets.

On the balance sheet's assets side, accountants record goodwill and other intangible assets, such as the value of patents, licenses, and brands. Those are written with a monetary value because they have the potential to influence the revenues. While the return on equity formula (ROE) includes overall equity, it is always worth knowing the intangible assets' impact in that process.

Let's take a quick example: Coca-Cola. We will probably agree that if their beverages did not have their logo printed on the bottle, the sales would be way less. Then, a way of measuring the impact of the intangible assets on the company is by calculating the tangible book value and applying it to the ROE calculator. Or you can simply do the calculation by hand with the following formula:

Tangible book value = Book value - Total Intangible assets

As a side note, debt may influence ROE. Consequently, it is highly recommended to use the financial ratios: "return on employed capital" and "return of invested capital" for a better picture of the money that equity has generated.

Book value per share and tangible book value per share

Because public companies usually have millions of shares and the book value of certain companies might be expressed in thousands of millions of dollars, it is more pragmatic to measure the mentioned items above on a per-share basis.

You will need the number of shares outstanding obtained from the income statement. Also, you can use our handy market cap calculator to obtain the value. You will only need to add the company's market capitalization (easy to find on Google) and its price per share.

The book value per share and tangible book value per share formulas are as follows:

Book value per share = Book value / Numbers of shares outstanding

Tangible book value per share = Tangible book value / Numbers of shares outstanding

We designed our fantastic price-to-book ratio calculator to help you calculate both per-share values. You just have to click on the advanced mode option.

Price to book ratio

We have now reached the main point of this article: What is the price-to-book ratio formula? and, also important, how to calculate the price-to-book ratio?

Price to book value ratio = Share price / Book value per share

But we cannot continue without mentioning two details:

  • Book value of equity represents all equity divided between the preferred stockholder and the common stockholders. So in the case where we are common stockholders, we will have to discount the preferred stocks (stock that entitles the owner to receive dividends from the earnings before the common stockholder). Then the real book value that matters to us will be:

    Book value = Total stockholder equity-Preferred equity

  • When using this ratio and other financial ratios, it is essential to conduct it between companies in the same industry. This rule is especially crucial when taking into consideration tangible book value. For instance, in the semiconductors industry, several companies have so much value in intangible assets that the tangible book value of equity turns negative. However, that does not mean that the company is non-lucrative.

How to use the price to book ratio formula

After all the previous explanation, we would like to show a summarized, step-by-step list of formulas about how to calculate the price-to-book value ratio:

  1. Book value = Total stockholder equity - Preferred equity

  2. Book value per share = Book value / Numbers of shares outstanding

  3. Price to book value ratio = Share price / Book value per share

Then for the price to tangible book value:

  1. Tangible book value = Book value - Total Intangible assets

  2. Tangible book value per share = Tangible book value / Numbers of shares outstanding

  3. Price to tangible book value ratio = Share price / Tangible book value per share

Book value vs. market value and how to profit from it

What is my goal when making a certain investment? What is my desired return on investment? Those are two of the main questions we ask while formulating an investment thesis. After we have decided which company to buy, it is important to see that it is not overvalued.

In that sense, the price-to-book ratio compares the book value vs. the market value, showing us the market’s appreciation towards a company. We can say that if the market-to-book ratio is high, the market has huge expectations for the business's future. Meanwhile, when such a ratio is low, it expresses investors' disbelief regarding the company.

Generally speaking, investors can profit from it when:

  • Price to book ratio is lower than historical average; considering historical earnings per share to be positive (strategy: low risk, less profit).
  • A price to book value lower than one, indicating that the company is trading at a lower price than its assets costs (strategy: high risk, more profit).
  • Book value becomes negative, suggesting non-solvency and very likely imminent bankruptcy. Here you could short the stock for even higher profits (very high risk).

The most significant benefit of our price-to-book ratio calculator is that you can quickly add information and promptly get the historical values for analysis. Furthermore, you can use all of our cool financial calculators to improve your investments' risk-reward profile.

Real example: JP Morgan Chase & Company (NYSE: JPM)

JPM is one of the most relevant banks in the world. It provides services in the area of investment banking, commercial banking, and treasury services, among others. However, during the stock market crash of March 2020, the stock price declined by around 40%.

Now we can see how it affected the price-to-book ratio. In Particular, we can review if JPM stock became an exciting opportunity after the stock market crash. For this example, we will use the first quarter 2020 financial statements.

First, we will gather the information, and then we will put it in our price-to-book ratio calculator:

Total stockholder equity = 261,262 million USD

Preferred equity = 30,063 million USD

Book value = 231,199 million USD

Numbers of shares outstanding = 3,095.8 million USD

And by applying the book value per share formula,

Book value per share = 74.68 USD

Now, we have to decide on a price for the price-to-book ratio formula. The value will be 80.1 USD / share, which was the price of April 15th, the next day of the earnings release. Consequently,

Price to book value ratio = 1.07

Furthermore, regarding tangible book value, we will need the following:

Total intangible assets = 51,867 million USD

Thus,

Tangible book value per share = 57.93 USD

Price to tangible book value ratio = 1.38

If we put the annual values into our price-to-book ratio calculator, we will get a PB ratio of 1.9, which is way above 1.07.

In conclusion, the price-to-book value obtained suggests that the market could have undervalued the stock during that time.

The stock is currently trading at 100 USD, with a market-to-book ratio of 1.3, meaning that it can still have space to increase its value per share up to the 2019 price-to-book ratio.

Finally, the price-to-book ratio formula contains purely fixed past information, and that is its main limitation: it relies on past performance. At the same time, the return on our investment is based on future execution. If you are interested in checking how to take into account future cash profits, we suggest reviewing our discounted cash flow calculator.

Arturo Barrantes
Total stockholder equity
$
Preferred equity
$
Number of shares outstanding
Share price
$
Book value per share
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Price to book value ratio
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