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 net assets value of the company. 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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Source: Price to Book Value Formula (wallstreetmojo.com)
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 out 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 book value of the company is to deduct the total liabilities from the total assets. Doing this allows investors to find out the actual value at a certain point in time. Alternatively, the investors can also look at shareholders’ equity to find out the book value directly.
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 to see how the P/B ratio formula works.
Binge-Watching TV wants to see how their investors perceive them in terms of book value. They took out the market price of their equity shares and also zoomed in on their balance sheet for the shareholders’ equity. Here’re the details they found out –
- Market Price of each share – $105 per share
- Book Value of each share – $84 per share
As an internal accountant, you need to find out 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 Share
- Or, P/B Ratio = $105 / $84 = 5/4 = 1.25.
Price to Book Value Ratio of Citigroup
Let us now apply 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 Price to Book Value Ratio. First, we require Citigroup’s Balance sheet 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 is $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 = 71.57
- Citigroup’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 = 1.023x
- Citigroup Price to Book Value Ratio (2015) = $73.27/68.174 = 1.074x
Uses
- First of all, when an investor decides to invest in the 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 stocks of the company. If the investors are investing in banking companies, insurance firms, or investment firms, this ratio can be pretty 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 companies that have 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
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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. You can easily calculate the ratio in the template provided.
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This article has been a guide to Price to Book Value formula, its uses along with practical examples. Here we also provide you with Price to Book Value Calculator with a downloadable excel template.
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