The price/book (P/B) ratio measures a company’s stock price compared with its book value. The ratio is calculated by taking the market price per share of an investment and dividing it by the book value per share.
What is the price/book ratio?
Price/book is often used to determine if a stock price is over- or undervalued relative to its book value. A company that has a price/book ratio of 1.0 means that the price of the stock is priced at exactly what the company’s net assets--or book value--per share are worth. A ratio of 2.0 means that the stock price is two times what it should be based on the book value of the stock. A ratio of 0.5 means the stock price is undervalued at half of what the stock’s book value implies it should be.
Although price/book is often used for individual stocks, Morningstar calculates price/book for funds by weighing the fund’s equity holdings by the percentage of total equity assets. These weights then factor into how Morningstar calculates the overall price/book ratio for the equity holdings in a fund.