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KembaraXtra–Islamic Finance–Islamic Capital Market – Price-to-Book (P/B) Ratio and Return on Equity (ROE)
What is the Price-to-Book (P/B) Ratio?
The price-to-book (P/B) ratio compares a company’s market value with its book value. In simple terms, it shows how much investors are willing to pay for each dollar of the company’s net assets. It is an equity valuation ratio commonly used to assess whether a stock is cheap or expensive relative to what the company owns on paper.
Simple Formula
P/B Ratio = Market Price per Share ÷ Book Value per Share
What is Book Value (in simple words)?
Book value represents the net worth of a company according to its balance sheet. It is calculated as:
- Total assets minus liabilities
- Often excludes intangible items like goodwill and patents
- Reflects the theoretical value shareholders would receive if the company were liquidated
On a per-share basis, book value tells us how much equity backs each share.
Simple Example of Book Value
Assume a company has:
- Total assets = USD 1,000 million
- Total liabilities = USD 700 million
Book value (shareholders’ equity) = 1,000 − 700 = USD 300 million
If the company has 100 million shares, then:
Book value per share = 300 ÷ 100 = USD 3
Simple Example of P/B Ratio
If the market price of the share is USD 6 and the book value per share is USD 3:
P/B Ratio = 6 ÷ 3 = 2.0
This means investors are willing to pay 2 times the company’s book value for its shares.
How to Interpret the P/B Ratio
- P/B
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