<p>Price to Book (P/B) ratio is a valuation metric that compares a company's stock price to its <a href="/NewSite/encyclopedia/book-value/" class="ency-link">book value</a> per share. It's a fundamental analysis tool used to assess the market's perception of a company's value relative to its net asset value.</p>

<h2>How It Works</h2>
<p>The P/B ratio is calculated by dividing the current stock price by the book value per share. The book value is the net asset value of a company, calculated as total assets minus total liabilities. Here's the formula:</p>
<p><strong>P/B Ratio = Stock Price per Share / Book Value per Share</strong></p>

<h2>Why It Matters</h2>
<p>The P/B ratio helps investors understand whether they're paying a fair price for a company's shares. A P/B ratio of 1 means the market price equals the book value, suggesting the stock is fairly priced. Ratios above 1 indicate the market price is higher than the book value, potentially signaling overvaluation. Ratios below 1 suggest undervaluation. However, P/B ratios should be interpreted with caution:</p>
<ul>
  <li>Companies with high growth potential may have high P/B ratios due to the market's anticipation of future earnings.</li>
  <li>Conversely, companies with low P/B ratios may have low growth prospects or face significant risks.</li>
</ul>
<p>Therefore, it's essential to consider other valuation metrics and fundamental factors when using the P/B ratio.</p>