This ratio compares a company's stock price to its book value, which is the value of its assets minus its liabilities. It helps investors understand whether a stock is trading above or below the accounting value of the company's net assets. A low price-to-book ratio might indicate an undervalued stock, though it could also signal that the company faces problems.
A company has total assets of $100 million and total debt of $40 million, giving it a book value of $60 million. If the company has 10 million shares outstanding, the book value per share is $6. If the stock trades at $12 per share, the price-to-book ratio is 2.0, meaning investors are paying twice the accounting value of assets.
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