Description
While the P/E ratio measures the price per share of a stock relative to its Earnings Per Share (EPS), the Price to Book ratio measures the price of a stock relative to its “book value” per share. In a nutshell, book value per share is simply the Stockholder’s Equity portion of the Balance Sheet divided by the number of shares outstanding. Stockholder’s Equity (SE) is simply a company’s Assets minus its Liabilities. For example, let’s say you represent a company, and all you own in the world is a $5 bill. However, you owe a friend $2 that you borrowed a week ago. Your SE would then be $5 - $2 = $3.
Calculation
Note: Book Value Per Share = Stockholder’s Equity / Number of Outstanding Shares
What it Means
Because Net Income (Earnings Per Share = Net Income / Number of Outstanding Shares) can be easily manipulated via accounting methods, the P/E ratio can sometimes be misleading. The P/B ratio provides investors with a way to look at a stock’s price when compared to the residual assets left over when all liabilities are subtracted.