V05: P/B (Price-to-Book) — how to analyse it

P/B works for companies with large physical assets (property, industry, banks). P/B < 1 means you buy assets cheaper than they are booked.

This is V05 — P/B (Price-to-Book) in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a collection of stories. In this article you get the variable explained, how to compute it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

P/B is the oldest valuation multiple — it arose in Renaissance Venice when bankers valued trading houses on their inventories and ships. Luca Pacioli (1494) formalised accounting with double-entry bookkeeping, which gave P/B a mathematical foundation. On the Amsterdam stock exchange (1602) P/B was the standard for valuing the VOC share — investors compared the course of the price with the company's booked net value. During the industrial revolution (the 1800s) P/B became dominant for railway and steel companies where physical assets were the main capital. Benjamin Graham (Security Analysis, 1934) formalised the 'net-net' strategy — buy companies below 2/3 of liquidation value (in practice TBV). This was the P/B investment strategy of the first half of the 1900s.

What P/B is and why it works

P/B in its simplest form Price-to-Book (P/B) is the market value divided by equity (book value). If a company is worth 1 000 MSEK on the stock exchange and has 500 MSEK in equity, P/B = 2. You pay 2 kronor for every krona the company's net worth is booked at. P/B answers the question: 'Am I paying a premium or a discount for the company's assets minus liabilities?'. P/B < 1 means you buy the assets cheaper than they are booked — a theoretical buying opportunity (though it is often a warning, as we shall see). P/B > 5 means the market is pricing in large future values that do not show in the accounting — intangible assets, brand, moat, growth expectations. The AKM1 scale: P/B < 1 = score 5; 1-1,5 = score 4; 1,5-3 = score 3; 3-5 = score 2; > 5 = score 1. 📖 DEFINITION P/B = Market value / Equity. Alternatively: take the stock's share price and divide by book value per share. Measured as a valuation multiple. P/B 1 = you pay book value; P/B 0,8 = 20% discount; P/B 2 = 100% premium.

Computing and interpreting P/B in practice

Find the right number in the annual report To compute P/B you need: market value and equity. Market value = share price × number of stocks (same as for P/S — see Variable 4). You fetch equity from the lower part of the balance sheet (in Swedish financial reporting: under 'Equity and liabilities'). Equity includes: share capital, reserve fund, retained profit/loss, other equity. Note: use the WHOLE equity INCLUDING minority shares if the company has subsidiaries that are not 100% owned. Some sources report 'P/B excluding minority' — use that if you want a 'pure' owner perspective. Important: adjust for own stocks (treasury stock) — these should be deducted from equity. Example: Handelsbanken 2023 — share price ~115 SEK, number of stocks ~2 050M, market value ~235 000 MSEK. Equity 2023: ~145 000 MSEK. P/B = 235 000 / 145 000 = 1,62.

Three perspectives on P/B (Price-to-Book)

Peter Lynch: Lynch rarely used P/B — he argued that modern service and technology companies have little book value. 'P/B works for banks and insurance companies, but not for software.' He preferred P/E and growth. For financial companies Lynch used P/B < 2x as a rough screen.

Benjamin Graham: Graham's classic rule: buy companies with P/B below 1.5x. 'No company is worth more than 1.5 times its booked value, regardless of growth.' He combined P/B < 1.5 with P/E < 15 and ROE > 10% in his 'defensive investor' screen. Graham's 'cigar butt' strategy: P/B < 1x (buy below book value).

AK1's interpretation: AKM1 weight 6%. P/B is most relevant for financial companies and capital-intensive industry. For service and technology companies P/B is less meaningful due to intangible assets. We adjust P/B for intangible assets and goodwill. AKM1 combines P/B with ROE (V09) — high ROE + low P/B = an undervalued compounder.

Go deeper

Combine P/B with RoE, P/E, and cash flow

Want to practise with worked examples, chapter by chapter? The course P/B (Price-to-Book) (V05) contains 6 chapters, Lynch and Graham perspectives and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

What is P/B?

P/B (Price-to-Book) sätter bolagets marknadsvärde i relation till det bokförda egna kapitalet — tillgångar minus skulder. Ett P/B på 1 betyder att aktien handlas till bokfört värde; 0,8 betyder 20 % rabatt mot bokförd nettoförmögenhet. Multipeln svarar på frågan om marknaden betalar premium eller rabatt för bolagets balansräkning.

What does P/B below 1 mean?

A P/B below 1 means the share trades cheaper than the booked equity. It can reflect a deeply undervalued balance sheet — but often it is the market's way of signalling doubt about the assets' real value or future profitability. In the education, P/B below 1 is used as a starting point for further analysis, not as a finished conclusion.

For which companies does P/B work best?

P/B is most meaningful for banks, insurance companies and capital-intensive industry, where the balance sheet's assets are the core of the business. For service and technology companies whose value lies in brand, software and knowledge, booked equity is often small, and P/B can then give a misleading picture — such companies are better analysed with P/E and cash flow multiples.

Is a low P/B always better?

Nej. Ett lågt P/B kan hänga ihop med svag avkastning på eget kapital (ROE) eller med nedskrivningsrisk i tillgångarna. Benjamin Grahams klassiska utbildningsregel var att kombinera lågt P/B med högt ROE och lågt P/E — multiplar som kombineras säger mer än varje multipel ensam. AKM1-modellen justerar dessutom P/B för goodwill och immateriella tillgångar.

This is educational financial analysis, not investment advice.