Price-to-Book Ratio vs. Price-to-Tangible-Book Ratio: Key Differences for Investors

When evaluating a company’s valuation, two commonly used metrics are the Price-to-Book (P/B) Ratio and the Price-to-Tangible-Book (P/TB) Ratio. Both ratios help investors assess whether a stock is overvalued or undervalued relative to the company’s assets, but they measure slightly different aspects of a company's value. Understanding the differences between the P/B ratio and the P/TB ratio can help investors make more informed decisions when comparing stocks.

What is the Price-to-Book (P/B) Ratio?

The Price-to-Book (P/B) Ratio is a valuation metric that compares a company's market price to its book value (net asset value). The book value represents the company's total assets minus its total liabilities and is found on the balance sheet. The P/B ratio is used to assess whether a stock is trading above or below its actual book value.

How to Calculate the P/B Ratio:

The book value per share (BVPS) is calculated by dividing the company’s book value by the number of outstanding shares. The P/B ratio shows how much investors are willing to pay for each dollar of the company’s net assets.

Example:

If a company has a market price of $50 per share and a book value per share of $25, the P/B ratio would be:

This means investors are willing to pay $2 for every $1 of the company’s net assets.

Why the P/B Ratio Matters:

• Valuation Insight: A lower P/B ratio (below 1) may indicate that a stock is undervalued compared to its net assets, while a higher P/B ratio (above 1) may suggest that the stock is overvalued.
• Asset-Heavy Industries: The P/B ratio is particularly useful for companies in asset-heavy industries, such as manufacturing, banking, or real estate, where tangible assets are a significant part of the business.
• Balance Sheet Focus: P/B focuses on the balance sheet, making it valuable for investors looking at the underlying value of a company’s assets.

What is the Price-to-Tangible-Book (P/TB) Ratio?

The Price-to-Tangible-Book (P/TB) Ratio is a more conservative version of the P/B ratio. It measures a company’s market price relative to its tangible book value, which excludes intangible assets like goodwill, patents, and trademarks. Tangible assets are considered the most reliable form of value because they can be more easily liquidated or sold.

How to Calculate the P/TB Ratio:

The tangible book value per share (TBVPS) is calculated by subtracting intangible assets from the total book value and then dividing by the number of outstanding shares. This ratio provides insight into the company’s value based solely on its physical assets.

Example:

If a company has a market price of $50 per share and a tangible book value per share of $20, the P/TB ratio would be:

This means investors are willing to pay $2.50 for every $1 of the company’s tangible net assets.

Why the P/TB Ratio Matters:

• Focus on Tangible Assets: The P/TB ratio gives investors a clearer picture of the value of a company’s physical assets by excluding intangibles that may be harder to value or sell.
• More Conservative Measure: By removing intangible assets, the P/TB ratio is a more conservative measure of a company’s value, especially useful for assessing companies with significant intangible assets (like tech companies or brands).
• Liquidation Value: The P/TB ratio is helpful in assessing the company’s liquidation value—the tangible assets that could be sold if the company were liquidated.

Key Differences Between Price-to-Book and Price-to-Tangible-Book

1. Inclusion of Intangible Assets

• P/B Ratio: The P/B ratio includes both tangible and intangible assets. This means it can sometimes overestimate the company’s true value, especially if the company’s intangible assets are overvalued or difficult to sell (like goodwill).

• P/TB Ratio: The P/TB ratio focuses exclusively on tangible assets, giving investors a clearer view of the company’s value based solely on its physical assets. It excludes intangibles, which can fluctuate in value.

2. Conservatism in Valuation

• P/B Ratio: The P/B ratio is generally less conservative because it includes all assets, both tangible and intangible. This can be useful for companies with valuable intellectual property or strong brand recognition, but it may overstate value in some cases.

• P/TB Ratio: The P/TB ratio is a more conservative measure, focusing only on tangible assets. It provides a more grounded view of a company’s liquidation value, making it a better option for investors who prefer a conservative approach.

3. Industry Use

• P/B Ratio: Useful for asset-heavy industries, such as real estate, banking, or manufacturing, where the value of both tangible and intangible assets can be significant.

• P/TB Ratio: Particularly helpful for industries where intangible assets (such as goodwill, patents, and brands) make up a large portion of the company’s book value, such as technology or pharmaceutical companies.

4. Assessment of Financial Stability

• P/B Ratio: Can give a broader view of a company’s total asset value, but may misrepresent companies with overvalued intangibles. This can lead to artificially high valuations in certain cases.

• P/TB Ratio: Provides a more cautious assessment of a company’s financial health by focusing on assets that are easier to value and liquidate, making it especially useful during times of financial uncertainty.

When to Use the P/B Ratio vs. P/TB Ratio

Use the P/B Ratio When:

• Evaluating Companies with Significant Intangible Assets: If the company’s intangible assets are important to its value (such as brand or intellectual property), the P/B ratio is a more appropriate metric.

• Assessing Companies in Asset-Heavy Industries: The P/B ratio is especially useful for evaluating companies in industries where tangible and intangible assets both play a role in driving value, such as manufacturing or real estate.

Use the P/TB Ratio When:

• Focusing on Tangible Asset Value: If you want to focus on a company’s physical assets and exclude potentially overvalued intangible assets, the P/TB ratio is the better choice.

• Assessing Conservative Investments: For investors who prefer a more conservative approach, the P/TB ratio helps identify companies with strong tangible asset backing, which can be more reliable in difficult economic times.

Conclusion: Price-to-Book vs. Price-to-Tangible-Book – Which is Better?

Both the Price-to-Book (P/B) Ratio and the Price-to-Tangible-Book (P/TB) Ratio are valuable tools for assessing a company’s valuation, but they serve different purposes. The P/B ratio offers a broader view by including both tangible and intangible assets, making it useful for companies with significant intellectual property or brand value. The P/TB ratio, on the other hand, provides a more conservative and grounded assessment by focusing only on tangible assets, which are easier to value and liquidate.

For investors, the choice between these two metrics depends on the company being analyzed and the investment strategy. The P/B ratio is ideal for evaluating companies where intangible assets are a core part of their value proposition, while the P/TB ratio is better suited for those looking to invest in companies with strong tangible asset backing. By using both ratios, investors can get a more complete picture of a company’s true value and make more informed decisions.