Price to book

Book value is total assets minus total liabilities: what the accounts say the owners would be left with if everything were sold at its carrying value and the debts repaid. Price to book compares the share price against that figure per share.

Below one, the market is valuing the company at less than its accounting net worth. That sounds like an obvious bargain and usually is not, because the market is generally expressing a view that the assets are worth less than the accounts claim, or that the business will destroy value from here.

For a bank or an insurer, the balance sheet largely is the business. The assets are loans and securities carried at values that are frequently marked to market, so book value is a reasonably current estimate of net worth rather than a historical artefact. This is why price to book remains a standard measure for financials and why bank valuations are so often quoted as a multiple of book.

Even here it is a claim about asset quality more than about the price. A bank trading well below book is usually one whose loan book the market does not trust, and the ratio is how much of that book the market believes is overstated.

Accounting rules require most spending on research, brands, software and training to be expensed as it occurs rather than recorded as an asset. So the things that actually make a modern company valuable are largely absent from its book value, and the ratio ends up dividing a price that reflects them by a figure that does not.

The consequence is that high price-to-book ratios cluster in exactly the industries where the measure means least, and comparing a software company against a manufacturer on this basis compares two different accounting treatments rather than two businesses. Sustained buybacks compound it by shrinking book equity directly, and taken far enough equity turns negative and the ratio becomes meaningless rather than merely high.

Book value per share is only meaningful beside a price on the same basis. For a company with multiple share classes, the reported figure may be per share of a class that is not the one quoted, which produces a ratio wrong by the conversion factor between them rather than a cheap valuation.

A reported price-to-book of exactly zero is not a company available for nothing; it means the figure was not computable and something upstream recorded a zero instead of an absence. Any ratio far outside the ordinary range is worth treating as a data question first and a valuation question second.