Short answer: The price-to-book ratio, or P/B ratio, compares a company’s total market value, or its share price, with the book value of its equity, which is its net asset value. It is calculated by dividing market capitalisation by book value, and a ratio above 1 is common because market value usually exceeds book value.
Last reviewed: 9 November 2026
At a glance
| Term | What it means |
|---|---|
| Market capitalisation | Current share price multiplied by the number of outstanding shares |
| Book value | Total assets minus total liabilities, as shown on the balance sheet |
| Book value per share | Often close to the company’s liquidation value |
| P/B ratio | Market capitalisation divided by book value |
| Liquidation value | What would remain for shareholders if the company shut down and paid its liabilities |
How is the ratio calculated?
Market capitalisation is the total value the stock market places on a company. It is found by multiplying the current share price by the number of outstanding shares, which are the shares held by investors. Book value is the accounting net worth, calculated by subtracting total liabilities from total assets, as shown on the balance sheet.
The P/B ratio is market capitalisation divided by book value. Equivalently, it is market price per share divided by book value per share. Both routes give the same answer, as the worked example below shows.
What does a worked example look like?
The following is a hypothetical example with invented figures, using a made-up company called Example Textiles Ltd. Its share price is ₹100 and it has 2 crore outstanding shares, so market capitalisation is ₹200 crore. Its total assets are ₹300 crore and its total liabilities are ₹150 crore, so book value is ₹150 crore.
The P/B ratio is ₹200 crore divided by ₹150 crore, which equals 1.33. Book value per share is ₹150 crore divided by 2 crore shares, or ₹75, and ₹100 divided by ₹75 also gives 1.33.
What does a ratio above 1 tell you?
A ratio above 1 means the market values the company at more than the net assets recorded on its balance sheet. This is common, because market value usually exceeds book value. A high ratio suggests investors expect strong future performance.
That expectation is a judgement built into the share price, not a measured fact. The ratio shows how far the price has moved above accounting net worth, but it cannot tell you whether those expectations will be met.
Why can a ratio below 1 be a warning sign?
A ratio below 1 means the share price is lower than book value per share. It can look like a bargain, but it can also signal serious problems. These include financial distress, poor asset quality, or assets that are overstated on the balance sheet.
Consider a hypothetical case for Example Textiles Ltd. Suppose its share price falls to ₹60, so market capitalisation is ₹120 crore and the P/B ratio is 0.80. Now suppose ₹60 crore of its reported assets could not actually be recovered. Adjusted book value would fall to ₹90 crore, and the ratio would be 1.33 rather than 0.80. A reading below 1 is only as reliable as the balance sheet behind it.
Where does book value fall short?
Book value is based on historical cost, which means assets are recorded at what was paid for them, not what they are worth today. It also excludes intangible assets such as brands, patents, and human capital. Because these are left out, book value can understate what a business is worth, and the P/B ratio can look higher than it would if those assets were counted.
Book value per share is often close to a company’s liquidation value. Liquidation value is what would remain for shareholders if the company shut down and paid its liabilities. This makes it a useful reference point, but it is not a forecast of what a share would fetch in a sale.
How should you use the ratio?
The P/B ratio is one lens among several, not a verdict. It is most informative when read alongside the balance sheet itself, so you can check what the book value includes and what it leaves out. Comparing a ratio across companies also requires care, since their asset mixes can differ widely.
Frequently asked questions
Is a P/B ratio below 1 always a bargain?
No. A ratio below 1 can also signal financial distress, poor asset quality, or assets that are overstated on the balance sheet.
Why is a P/B ratio above 1 so common?
Market value usually exceeds book value, so the ratio usually sits above 1. A high ratio suggests investors expect strong future performance.
Does book value include a company’s brand?
No. Book value is based on historical cost and excludes intangible assets such as brands, patents, and human capital.
What is the difference between market capitalisation and book value?
Market capitalisation is the current share price multiplied by outstanding shares. Book value is total assets minus total liabilities, as shown on the balance sheet.
Sources and last check
Facts in this article were checked against the sources below on 9 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- dhan.co (broker education)
- kotakneo.com (broker education)
- upstox.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.