Key Ratios
~4 min read
Price-to-Book (P/B) Ratio
Price-to-Book (P/B) Ratio: Is the Stock Worth More Than Its Assets?
The Price-to-Book ratio compares a company's market price to the book value of its assets. It is especially important for evaluating banks and financial institutions on the NSE.
The Formula
P/B Ratio = Share Price / Book Value Per Share
Book Value Per Share = (Total Assets - Total Liabilities) / Number of Outstanding Shares
If Equity Group's share price is KES 50 and its book value per share is KES 35, the P/B ratio is approximately 1.43. This means the market values the company at 1.43 times the accounting value of its net assets.
Interpreting the P/B Ratio
- P/B above 1 — The market values the company higher than its book value. This is common for well-run companies with strong brand, intellectual property, or growth prospects.
- P/B equal to 1 — The stock is trading at exactly its book value.
- P/B below 1 — The stock is trading below book value, meaning you could theoretically buy the company for less than its net assets are worth. This could signal an undervalued opportunity or underlying problems.
Why P/B Matters for Banks
The P/B ratio is the go-to valuation metric for NSE-listed banks. Banking is an asset-heavy business where book value closely reflects the economic value of the enterprise:
- Equity Group and KCB typically trade at P/B ratios above 1, reflecting the market's confidence in their asset quality and management.
- Smaller or struggling banks may trade below book value if the market questions the quality of their loan portfolios.
When P/B Is Less Useful
- Technology and service companies — Safaricom's greatest asset is its M-Pesa platform and brand, neither of which appears fully on the balance sheet. P/B understates the true value of such companies.
- Companies with outdated asset values — Book value is based on historical cost, which may not reflect current market values for property or equipment.