What is Price to Book Ratio?
What is Price to Book Ratio
The price to book ratio is a financial ratio which is determined by dividing the current market price with respect to the book value of the stock.
Price to Book Ratio
The market value of the share is the current market price at which the shares are being sold or bought in the equity market. The market price depends upon both external and internal factor and may easily get influenced by the changes in the scenario of the market positions.
The book value is the actual value of the stock depending upon the total equity gained from each common stock held by the stockholders.
Book value of share = Equity / No. of shares
The price to book ratio helps to determine the market value of each share with respect to the book value of the share.
Price to Book Value = Current market price of share / Book value of share
Suppose, we consider a company has 100 number of stocks with a capital raised of 5000 Rs. Now, if we consider that the current price at which the stock is bought or sold in the market is 85 Rs.
Equity = 5000Rs
No of shares = 100
Book value = 5000/100
Book value = 50 Rs
We know that
Current market price of share = 85 Rs
Price to Book Ratio = 85/50 = 1.7
If the market value is lower than the book value, it would certainly mean that the stock is undervalued thus giving may increase in the future. This can also act as a warning sign to the investor giving them a sign that the company is not performing well and the demand for the stocks in the market has decreased.