The price to book reflects the value that market participants attach to a company's equity relative to the book value of its equity. A stock's market value is a forward-looking metric that reflects a company's future cash flows. The book value of equity is an accounting measure based on the historic cost principle and reflects past issuances of equity, augmented by any profits or losses, and reduced by dividends and share buybacks.

The price to book value is the share Price divided by the book value per share. The BVPS is calculated as follows: (Common Equity less Intangibles divided by the Fully Diluted Shares Outstanding at the end of the period. Market value per share is obtained by simply looking at the share price quote in the market.

A lower P/B ratio could mean the stock is undervalued. However, it could also mean something is fundamentally wrong with the company. As with most ratios, this varies by industry. Another way to look at P/B ratio is the premium that would remain if the company went bankrupt immediately (for example, a 1.6 book value implies a 60% premium).

Formula

Price / BVPS

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