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CFA Level II Exam · Market-Based Valuation: Price and Enterprise Value Multiples

Price to Book Value (P/B) Ratio for CFA Level II

Updated 7 October 2026 · Fact-checked

The P/B ratio is market price per share divided by book value of equity per share. To solve questions, compute book value per share from common equity, adjust for comparability if asked, then use the justified P/B = (ROE − g) ÷ (r − g) to judge whether a stock looks cheap or expensive.

Understand Price to Book Value (P/B) Ratio

Price to book value (P/B) compares what the market pays for a share with the accounting equity behind it. A P/B above 1 means the market values the firm above its recorded net assets. A P/B below 1 means it values the firm below them.

Book value per share uses only common equity. Start with total equity. Under IFRS, total equity usually includes non-controlling interest, so subtract it. Also subtract preferred stock (and any other claims that are not common), then divide by the number of common shares outstanding. Use shares outstanding, not shares issued, so treasury shares are excluded.

Book values are not always comparable across firms, so analysts adjust them. Typical adjustments: subtract intangible assets such as goodwill if you want tangible book value, restate assets carried at historical cost to fair value (for example inventory under LIFO, or property), and remove or add off-balance-sheet items. Under IFRS, some assets are revalued and some are not, so differences in accounting choices can distort P/B across companies. Adjust before you compare.

P/B links to fundamentals through ROE. Starting from the Gordon growth model with a sustainable growth rate, the justified P/B is (ROE − g) ÷ (r − g), where r is the required return on equity and g is the sustainable growth rate. If ROE is above r, the justified P/B is above 1. If ROE equals r, it is 1. If ROE is below r, it is below 1. A higher ROE or a lower required return raises the justified P/B.

The ratio is useful when book value is a meaningful measure of value: financial institutions, companies with mostly liquid assets, and firms with negative earnings where P/E fails. It is weak for firms with heavy intangibles, service firms with few tangible assets, firms with very different accounting choices, and when inflation or technology makes book values differ widely from true economic value. Share buybacks, impairments and asset write-downs also change book value without changing the economics in a clean way.

Key formulas to remember

P/B ratio
P/B = Market price per share ÷ Book value per share
Use the same per-share basis for both parts. Market price is the current share price.
Book value per share
BVPS = (Total equity − Preferred stock − Non-controlling interest) ÷ Common shares outstanding
Exclude treasury shares from the share count. Subtract non-controlling interest when total equity includes it, as it usually does under IFRS. Use the date the question gives.
Justified P/B
Justified P/B = (ROE − g) ÷ (r − g)
Valid for a constant sustainable growth rate with g < r. Compare with the actual P/B to judge relative value.
Price from justified P/B
Justified value per share = Justified P/B × BVPS
Equals the residual income single-stage value when ROE and g are constant and book value grows at g.
Tangible book value per share
Tangible BVPS = (Common equity − Intangible assets including goodwill) ÷ Common shares outstanding
Use when intangibles are not reliable measures of value.

How to solve Price to Book Value (P/B) Ratio questions

Read the vignette for equity components, share counts, ROE, growth and required return, then follow these steps.

  1. 1Find common equity: take total equity and subtract preferred stock and non-controlling interest (total equity usually includes both).
  2. 2Find shares outstanding: use issued shares less treasury shares, at the date requested.
  3. 3Compute BVPS = common equity ÷ shares outstanding. Apply any comparability adjustments the question asks for (goodwill, fair value changes) to equity before dividing.
  4. 4Compute the actual P/B = price ÷ BVPS.
  5. 5If asked for a justified P/B, check g < r, then use (ROE − g) ÷ (r − g). Use the ROE and g the vignette gives; do not recompute unless it asks.
  6. 6Compare actual with justified P/B. Actual below justified suggests undervaluation; above suggests overvaluation, on the stated assumptions.
  7. 7For limitations questions, match the firm's situation (intangibles, accounting differences, financial firm, inflation) to the right strength or weakness.

Quickest way: Quick check using ROE versus r

When to use it: When the question only asks whether the justified P/B is above or below 1, or how it changes when inputs change.

  1. Compare ROE with r. ROE > r means justified P/B > 1; ROE = r means 1; ROE < r means below 1.
  2. For a change in ROE, r or g, plug into (ROE − g) ÷ (r − g) only for the changed figure. Keep the rest constant.
  3. Eliminate options that contradict the ROE versus r direction before doing any arithmetic.

Common mistakes in Price to Book Value (P/B) Ratio

  • Leaving preferred stock in the equity used for BVPS

    Total equity is the first number you see on the balance sheet.

    Fix: Subtract preferred stock first. BVPS is for common shareholders only.

  • Using shares issued instead of shares outstanding

    Both numbers appear in the vignette and look similar.

    Fix: Deduct treasury shares to get shares outstanding before dividing.

  • Using the justified P/B formula when g ≥ r

    Students plug numbers in without checking the condition.

    Fix: The formula needs g < r. Check this first; otherwise the result is meaningless.

  • Entering ROE and r or g as whole numbers in one place and decimals in another

    Rushing under time pressure.

    Fix: Convert every percentage to a decimal (0.12, not 12) before computing.

  • Assuming a low P/B always means undervalued

    Cheap-looking ratios are easy to read as bargains.

    Fix: Check ROE and risk. A low ROE or high required return justifies a low P/B. Compare with the justified P/B.

  • Applying P/B to a firm full of intangibles without caution

    Students memorize the ratio but forget that book value may not capture the firm's economic assets.

    Fix: State that book value understates intangible-heavy firms and consider tangible book value or another multiple.

Worked examples

Example 1

Vignette: Corvane Industries reports total equity of €880 million. This includes €60 million of preferred stock and €40 million of non-controlling interest. It has 110 million shares issued and 10 million treasury shares. Its share price is €11.70. Goodwill is €90 million, all attributable to the parent's common shareholders. Questions: (1) Compute BVPS and P/B. (2) Compute tangible BVPS and the P/B on that basis.

Show the solution
  1. Common equity = 880 − 60 − 40 = €780 million.
  2. Shares outstanding = 110 − 10 = 100 million.
  3. BVPS = 780 ÷ 100 = €7.80.
  4. P/B = 11.70 ÷ 7.80 = 1.50.
  5. Tangible common equity = 780 − 90 = €690 million.
  6. Tangible BVPS = 690 ÷ 100 = €6.90.
  7. Tangible P/B = 11.70 ÷ 6.90 = 1.696, about 1.70.

Answer: BVPS is €7.80 and P/B is 1.50. Tangible BVPS is €6.90 and tangible P/B is about 1.70.

Example 2

Vignette: An analyst values Halden Bank. Forecast sustainable ROE is 14%, growth is 6%, and required return on equity is 10%. BVPS is $25.00 and the share price is $44.00. Questions: (1) Compute the justified P/B. (2) Judge whether the stock looks under- or overvalued. (3) Find the justified P/B if the required return rises to 11%.

Show the solution
  1. Check g < r: 6% < 10%, so the formula applies.
  2. Justified P/B = (0.14 − 0.06) ÷ (0.10 − 0.06) = 0.08 ÷ 0.04 = 2.00.
  3. Justified value = 2.00 × 25.00 = $50.00.
  4. Actual P/B = 44.00 ÷ 25.00 = 1.76, below 2.00, so the stock looks undervalued.
  5. With r = 11%: (0.14 − 0.06) ÷ (0.11 − 0.06) = 0.08 ÷ 0.05 = 1.60.
  6. At 1.60, the justified value is 1.60 × 25 = $40.00, below the $44.00 price.

Answer: Justified P/B is 2.00 (value $50.00); at the $44.00 price the stock looks undervalued. If r rises to 11%, justified P/B falls to 1.60 (value $40.00), and the stock would look overvalued.

Exam tips

  • Read the equity section carefully in the vignette: preferred stock, non-controlling interest and treasury shares are common traps for BVPS.
  • Use the ROE versus r direction to eliminate options before calculating.
  • For limitations questions, tie your answer to the firm described: intangibles, differing accounting methods, or a financial firm where P/B suits.
  • Keep percentages as decimals and check g < r before using the justified P/B.

Price to Book Value (P/B) Ratio: frequently asked questions

What is the justified P/B formula in CFA Level II?

Justified P/B = (ROE − g) ÷ (r − g), where r is the required return on equity and g is the sustainable growth rate. It needs g to be below r. A higher ROE or lower r raises it.

How do you calculate book value per share?

Start with total equity. Subtract preferred stock and non-controlling interest (total equity usually includes both under IFRS) to get common equity, then divide by common shares outstanding. Use shares outstanding, which excludes treasury shares.

What are the main limitations of the P/B ratio?

Book value can differ from economic value because of historical cost accounting, intangible assets, inflation and different accounting choices. Share buybacks and write-downs also distort it. It works poorly for firms with few tangible assets.

When is P/B most useful?

It is most useful for financial institutions, firms with mostly liquid assets, and firms with negative earnings where P/E cannot be used. It also helps when you need a valuation anchor that is more stable than earnings.