The Price-Book Ratio is another company valuation tool which compares a company’s book value to its market value. The price-book ratio indicates a company management’s ability in creating value for its shareholders.
The ratio can also be used to determine if a company is fairly valued. In general, if the ratio is more than one, the stock is likely to be undervalued. Conversely, a ratio of less than one indicates that the stock may be overvalued. The price-book ratio allows company value to be compared over a time frame, as well as against the value of other companies.
Price-Book Ratio = Book Value of Company ÷ Market Value of Company
Book Value = Company’s historical cost or accounting value of the company
Market Value = Market Capitalisation of the company