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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

A company's share price is Rs 450 and its book value per share is Rs 150. Which statement correctly describes its price-to-book (P/B) ratio?

The price-to-book ratio is 3.0, obtained by dividing the market price of Rs 450 by the book value per share of Rs 150. It means the market values the company's equity at three times its accounting net worth.

  1. AP/B is 3.0, meaning the market values the equity at three times its book valueCorrect
  2. BP/B is 0.33, meaning the shares trade below book value
  3. CP/B is 3.0, meaning the company earns three times its book value annually
  4. DP/B is 300, expressed as a percentage of face value

Explanation

P/B = market price / book value per share = 450/150 = 3.0. It compares market valuation with accounting net worth, not earnings. 0.33 inverts the ratio.

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