Price-to-Book and Price-to-Sales

When earnings are missing, tiny or distorted, other ratios help. Price-to-book compares the price with the company’s net assets; price-to-sales compares it with revenue. Here is when each one is useful and where each falls short.

Price-to-book (P/B)

Book value is assets minus liabilities, the accounting value of what shareholders own. P/B is market value divided by book value. It works best for businesses whose assets are mostly financial and valued close to market, like banks and insurers. A bank trading near 1 times book is priced about at the value of its net assets.

P/B is much less useful for software or brand-driven companies, whose most valuable assets, like code, patents and brands, barely show up on the balance sheet.

Book value is what is left for shareholders after subtracting liabilities from assets.

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