Book value is what shareholders would theoretically receive if the company liquidated all its assets and paid off all its debts. The P/B ratio measures how much the market is paying relative to that accounting net worth.
The formula
P/B = Stock Price ÷ Book Value Per Share. Book Value = Total Assets − Total Liabilities. If a stock trades at $40 and its book value per share is $25, the P/B is 1.6×. A P/B below 1.0 means the market is valuing the company at less than its accounting net worth.
What P/B below 1 actually means
Graham considered P/B < 1 a strong signal of potential undervaluation — you're buying a dollar of assets for less than a dollar. In practice, a persistent P/B below 1 often means one of three things: the market doesn't trust the reported book value (asset write-downs coming), the business earns a poor return on its assets, or — occasionally — the stock is genuinely mispriced.
The key question is always: does the company earn a return on equity (ROE) that justifies paying above book value? A company generating 20% ROE deserves to trade well above 1× book. A company generating 5% ROE — below the cost of equity — arguably deserves to trade below book.
Where P/B works best — and where it fails
| Industry | P/B usefulness | Why |
|---|---|---|
| Banks, insurers | High | Balance sheet is the business; assets are mostly financial instruments at market value |
| Real estate (REITs) | High | Property values are measurable; P/B close to NAV is the standard |
| Industrials, utilities | Moderate | Physical assets matter, but earnings power matters more |
| Technology, software | Low | Value is in intellectual property, talent, and network effects — none on the balance sheet |
| Healthcare, pharma | Low | R&D pipeline value dwarfs tangible assets; goodwill distorts book value |
The goodwill problem
When companies make acquisitions, they often pay above book value. The premium gets recorded as "goodwill" — an intangible asset on the balance sheet. A company that has grown through acquisitions may carry enormous goodwill that inflates book value. Analysts often prefer "tangible book value" — book value minus goodwill and other intangibles — for a cleaner picture.
How to read the P/B history chart
Like the P/E chart, the shaded band shows the 25th–75th percentile range of historical P/B readings. When the current value dips near or below the band, the market is pricing the stock's assets at an unusually low premium — often an opportunity worth investigating. Rising P/B over time, with rising ROE, is usually healthy (the market is rewarding better asset use).
The stock pages on Sixtycents show P/B history alongside percentile context — particularly useful for financial stocks where P/B is the primary valuation anchor.
Explore a bank stock →