This ratio compares the current share price of a firm to the book value per share to give an indication about whether it is cheap or expensive.

For example if a firm has net assets (it’s “book”) of £100m and 100m shares in issue, the book value per share is £1 (£100m/100m). Let’s say the current share price is £2, then the price to book ratio is 2 (£2/£1). As a rule of thumb if this ratio is above one a firm may be considered expensive whereas below one it may be considered cheap – by buying the share you are getting its book at a discount. However this ratio is only really useful in asset intensive sectors where the book value of a firm’s assets is a reliable guide to a firm’s true value.

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