Price-to-Book Ratio (P/B)

P/B is most useful for asset-heavy industries where book value closely approximates fair value — banks, insurance companies, REITs, and holding companies. For these businesses, assets (loans, investment portfolios, real estate) are already carried near market value on the balance sheet. P/B is less meaningful for asset-light businesses (tech, consulting) where the real value lies in intellectual property, brand, and human capital not captured on the balance sheet.

The key driver of P/B is Return on Equity (ROE) relative to the cost of equity. If ROE > cost of equity, the company creates value and should trade above 1.0x book. If ROE < cost of equity, it destroys value and should trade below 1.0x. Higher sustainable growth rates also push P/B higher. This is why high-ROE banks like JPMorgan trade at P/B premiums while struggling regional banks trade at discounts.

Book value is based on historical cost accounting and can differ significantly from fair value. Share buybacks reduce book equity (through retained earnings), potentially inflating P/B without any change in business fundamentals. Some analysts prefer Price/Tangible Book Value for companies with significant goodwill, as it strips out acquired intangibles that may not hold their value.