Price-to-book ratio (P/B) is a financial metric that gauges a stock’s value by comparing its market value to its book value. P/B is determined by dividing a company’s closing stock price per share by its book value per share.

--        P/B = Closing stock price per share / Book value per share.

A book value is the total of assets the company has after it has paid off its liabilities and intangible assets.

A low price-to-book ratio can signal a few things to prospective investors. It can mean that the company’s stock is either undervalued or underperforming. It can also indicate that a company may be having problems and may have low earnings projections.

Stocks with low P/B are deemed “underpriced” and are more attractive to value investors who like to find bargains. These investors tend look for companies that are “under the radar.” They can earn huge profits by purchasing the low-priced stocks of these promising companies. They then wait for the market to take notice of the company, which then can send its stock prices soaring. 

P/B does not always provide an accurate and complete assessment of a company’s financial health. It also varies between financial industries. For example, companies with a great deal of assets (such as equipment and machinery) usually have higher book value and a lower P/B. However, the metric does not take into account intangible assets and, therefore, does not accurately evaluate companies with smaller assets (i.e., consulting firms). Also, certain events, such as acquisitions, can decrease a company’s P/B by raising its book value.