A share trades above its book value, and someone calls it expensive. Another trades below book value and is called a bargain. Both conclusions skip the work of understanding what the two numbers measure.
FINRA’s explanation of investment value distinguishes market value from book value, the accounting value of assets less liabilities. Accounting amounts are not a guarantee of the proceeds shareholders would receive if assets were sold.
Put the figures on the same basis
Consider a simplified fictional company with 12 million units of equity attributable to the relevant common shares and 6 million such shares outstanding. Its book value per share would be 2 units. If the market price is 3 units, the corresponding price-to-book ratio is 1.5.
This example omits complications such as different share classes and accounting adjustments. In a real company, identify the correct equity amount, share count, reporting date and currency before calculating the ratio.
| Measure | Value |
|---|---|
| Relevant equity divided by shares | 12 million / 6 million = 2 per share |
| Market price per share | 3 |
| Price divided by book value per share | 3 / 2 = 1.5 |
Ask why the gap exists
The market price can reflect expectations about future earnings, risk and assets whose economic importance is not captured neatly in the balance sheet. Book value reflects accounting rules and recorded amounts at a reporting date. Those are different perspectives, not competing measurements of one perfectly observable number.
A low ratio can therefore raise a research question without answering it. Read the asset composition, liabilities, accounting notes and business outlook. Comparing an asset-heavy business with a company built largely around intellectual property can be misleading if the differences are ignored.
Also distinguish an up-to-date quotation from older financial statements. Label both dates in your notes rather than presenting the ratio as timeless.
This is an illustration of terminology and arithmetic, not a recommendation to buy or sell. For an investment decision, consider the wider risks and seek qualified advice where appropriate. The useful habit is to understand the source and limitations of each number before allowing their ratio to become a conclusion.