Investment word of the day: Price-to-book ratio — what is P/B ratio and why is it important?

Investment word of the day: There are several measures to understand whether a stock aligns with your investment or financial goals. The P/B ratio can be calculated by dividing the market price of a share by the book value per share. For example, If a company has a market price of ₹60 per share, a total book value of ₹20 crore, and one crore shares outstanding, Book value per share = ₹20 crore ÷ 1 crore shares = ₹20 P/B ratio = ₹60 ÷ ₹20 = 3 Hence, the market valuation of this company is five times the book value. The high P/B ratio is mainly used for appraisal of banking, real estate, and manufacturing industries, which have high tangible assets because material nature industries also have a direct impact on their business, according to Bharat Mundada, Mundada Finserve Pvt Ltd. “The deemed value of each share is higher than its book value implies strong expectations of company’s performance, which justifies higher P/B ratio by stockholder’s expectations but some low ratio is suggested to mean underestimation. For instance, a prudent investor with existing positive expectations would find the P/B ratio lower than three indicates strong future enhancement and while greater than three could be flagged as over expectation,” Mundada said.