How is the Price to Book Ratio (P/B) calculated?

The Price to Book Ratio (P/B) is calculated by dividing the market price per share of a company's stock by its book value per share. This ratio is a key financial metric used to assess whether a stock is overvalued or undervalued based on its book value.

To understand this further, the market price reflects what investors are willing to pay for a share, while the book value represents the net asset value of a company according to its financial statements (assets minus liabilities). By comparing these two figures, investors can gain insight into how the market values a company relative to its net asset value. A P/B ratio greater than 1 might suggest that the market believes the company has good growth prospects, while a ratio below 1 might indicate potential undervaluation or concerns about the company’s future performance.

This particular calculation is critical for investors and analysts who aim to assess the valuation of stocks, particularly in sectors like banking and finance, where tangible assets and stable earnings are vital. The other choices do not provide a correct methodology for calculating the P/B ratio, as they focus on different financial concepts and measures.