What is Price-to-Book (P/B) Ratio?
Supposedly, you invested $ 10 million into a business.
1 year later, you made $ 1 million in profits and have paid yourself $ 0.5 million in dividends.
How much money do you now have inside your business?
The answer is $ 10.5 million. It is the addition of your capital of $ 10 million and retained earnings of $ 0.5 million. That $ 10.5 million is also known as equity or book value of your business after owning it for 1 year.
At that time, you met Mr. Tan, an astute businessman.
Mr. Tan is interested to buy over your business for $ 21 million. So, what does it mean? It means, Mr. Tan is offering you $2 for every $1 inside the business. The offer is valued at Price-to-Book (P/B) Ratio of 2.0. As such, P/B Ratio is a tool to compare a