Formula to Calculate Price to Book Value

Price to book value is an important measure to see how much equity shareholdersEquity ShareholdersShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more are paying for the company’s net assets value. The price to book value ratio (P/B) formula is also referred to as a market to book ratioMarket To Book RatioThe market to book ratio depicts the company’s value, evaluated by dividing the market capitalization from the total book value of the firm. A market to book ratio higher than one signifies the organization’s overvaluation. However, a ratio lower than one indicates its undervaluation.read more and measures the proportion between the market price for a share and the book value per share. Here’s the formula of price to book value –

Price to Book Value Ratio = Market Price Per Share/Book Value per Share

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Explanation

There are two components of the P/B ratio formula.

  • The first component is the market price per share. Market price per share is volatile, and it continually changes. The investor can decide to take the market price for a definite period and use an averaging method to find a median.The second component of this ratio is the book value per share. There are many ways we can calculate the book value of the company. The best and most common way to find out the company’s book value is to deduct the total liabilities from the total assets. Doing this allows investors to find out the actual value at a certain time. Alternatively, the investors can also look at shareholders’ equity to determine the book value.

As you can understand, this ratio tries to analyze the proportion of the market price of each equity share and the book value per shareBook Value Per ShareThe book value per share (BVPS) formula evaluates the actual value of the common equity for each outstanding share, excluding the preferred stock value. A higher BVPS compared to the market value per share indicates an overvaluation of stocks and vice-versa.read more at a certain point in time.

Example of P/B Ratio Formula

Let’s take a practical example of how the P/B ratio formula works.

  • Market Price of each share – $105 per shareBook Value of each share – $84 per share

As an internal accountant, you need to determine the Price to Book Value Ratio.

To find out the P/B ratio formula, we need the market price per share and book value per share. In the above example, we know both.

Using the P/B ratio formula, we get –

  • P/B Ratio formula = Market Price per Share / Book Value per ShareOr, P/B Ratio = $105 / $84 = 5/4 = 1.25.

Price to Book Value Ratio of Citigroup

Let us now apply the Price to Book Value formulaBook Value FormulaThe book value formula determines the net asset value receivable by the common shareholders if the company dissolves. It is calculated by deducting the preferred stocks and total liabilities from the total assets of the company.read more to calculate Citigroup’s Price to Book Value Ratio. First, we require Citigroup’s Balance sheet Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more details. You may download Citigroup’s 10K report from here.

The below table shows the Consolidated Shareholder’s equity section found on Page 133

From the table above, Citigroup’s shareholders’ equity was $221,857 million in 2015 and $210,185 million in 2014.

Corresponding common stock outstanding numbers are 3,099.48 million shares in 2015 and 3,083.037 million in 2014.

  • Citigroup’s Book value in 2015 = $221,857 / 3099.48 = 71.57Citigroup’s Book value in 2014 = $210,185 / 3,083.037 = 68.174

Price of Citigroup as of 6th Feb 2018 was $73.27

  • Citigroup Price to Book Value Ratio (2014) = $73.27/71.57 = 1.023xCitigroup Price to Book Value Ratio (2015) = $73.27/68.174 = 1.074x

Uses

  • First of all, when an investor decides to invest in a company, she needs to know how much she needs to pay for a share of the net asset value per share. Having this comparison helps the investor decide whether this is a prudent investment or not.To take this further, many investors would like to do the valuation of the company’s stocks. If the investors are investing in banking companies, insurance firms, or investment firms, this ratio can be useful for valuing the companies.One thing the investors need to keep in mind. This ratio is not useful for companies that need to maintain large assets, especially those with huge R&D expenditures or long-term fixed assets.

Price to Book Value Ratio Calculator

You can use the following Price to Book Value Calculator

Calculate P/B Ratio Formula in Excel (with Excel Template)

Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Market Price per Share and Book Value per Share. Then, you can easily calculate the ratio in the template provided.

This article has been a guide to the Price to Book Value formula, its uses, and practical examples. We also provide you with a Price to Book Value Calculator with a downloadable excel template.

  • Price to Book Value ExamplesSum of the Parts ValuationPEG RatioPEG RatioThe PEG ratio compares the P/E ratio of a company to its expected rate of growth. A PEG ratio of 1.0 or lower, on average, indicates that a stock is undervalued. A PEG ratio greater than 1.0 indicates that a stock is overvalued.read moreBook to Market RatioBook To Market RatioThe book to Market ratio compares the book value of equity with the market capitalization, where the book value is the accounting value of shareholders’ equity. In contrast, market capitalization is determined based on the price at which the stock is traded. It is computed by dividing the current book value of equity by the market value.read more