Price-to-Book Ratio

Price-to-book compares what the market pays with what the accounts record, which works well for banks and financial firms whose assets are financial and carried near fair value, and badly for asset-light businesses whose value is in brands, people and software the balance sheet never recorded. A ratio below one does not mean a bargain: it often means the market expects the assets to earn less than their carrying value, which is a forecast of write-downs. Book value is also distorted by buybacks above book, accumulated losses and acquisition goodwill. The ratio is closely tied to return on equity, since a company earning well above its cost of equity deserves to trade well above book.