What is the price/book ratio?

The price/book ratio is a financial metric that compares a company's current market value to its book value. Specifically, it is calculated by taking the market value of a share of the company’s stock and dividing it by the book value per share. The book value per share represents the value of the company's equity based on its financial statements, while the market value per share reflects what investors are currently willing to pay for the stock in the market.

This ratio is particularly useful for investors as it helps them assess whether a stock is undervalued or overvalued. A price/book ratio greater than 1 may indicate that the market values the company more highly than its book value suggests, potentially due to expectations of future growth or profitability. Conversely, a ratio below 1 might suggest that the stock is undervalued relative to its aggregate asset values.

The other choices do not accurately define the price/book ratio. The second choice refers to a calculation involving total equity and market capitalization, which relates to a different aspect of financial analysis. The third choice describes the return on equity concept, which looks at profitability rather than asset valuation. The fourth choice discusses a comparison involving historical costs, but it does not relate directly to how the price/book ratio is defined or calculated.