P/B

Price-to-book value is the share price divided by book value per share — how many dollars the market charges for one dollar of accounting net worth. At a ratio of exactly one, the market prices the company at the equity on its books; below one it offers the recorded net assets at a discount; above one it charges a premium for everything the balance sheet cannot see.

The ratio means almost nothing until it is read next to the return the company earns on that book. A business compounding its equity at twenty percent a year is cheap at three times book; a business earning five percent on equity is expensive at a discount to book, because each retained dollar is being turned into less than a dollar of value. Price-to-book and return on equity are two halves of one sentence — the multiple is, in effect, the price of the return. This is also why the ratio connects to price-to-earnings: multiply the earnings multiple by return on equity and the book multiple falls out.

A price below book value carries two opposite readings, and telling them apart is the actual work. The first is Benjamin Graham's: the market, in one of its moods, is offering productive assets for less than their stated worth — the raw material of the entire value tradition. The second is the trap: the assets earn nothing and deserve their discount, or the book itself is inflated — stale carrying values, unimpaired goodwill from a bad acquisition, inventory nobody wants. A cheap ratio is an invitation to inspect the balance sheet, never a conclusion about it.

The measure works hardest where balance sheets are marked closest to reality. Banks and insurers are the natural habitat — their assets are largely financial instruments carried near fair value, and professionals price bank deals directly as multiples of book or tangible book. Asset-heavy industries come next. The academic respectability of the ratio comes from the same era: the long-documented tendency of low price-to-book stocks to outperform was measured on the industrial economy of the twentieth century, and that tendency has weakened as value migrated off the balance sheet.

The modern distortions are two. Intangible-rich businesses — software, brands, networks built by expensed engineering — carry their most valuable assets at roughly zero, so their ratios look permanently extreme without being informative. And long-running buybacks above book value shrink equity mechanically, to the point where some of the most successful repurchasers report negative book value; for them the ratio has no meaning at all. In both cases the honest response is to switch instruments, not to squint harder at this one.

The classic misuse is cross-sector comparison. A software firm at eight times book against a regional bank at 0.9 times book is not a finding — it is two industries with different accounting physics placed side by side. The ratio compares well within a sector, across a company's own history, and against the return on equity that justifies it; it compares poorly everywhere else.

Moatkeep computes the ratio as the split-adjusted share price divided by book value per share, with equity taken from the latest filed balance sheet, point-in-time and revised on restatement. When book value per share is zero or negative the ratio is displayed as not meaningful — a negative multiple is never shown — and every figure carries the fiscal period it was computed from, with the tangible-book variant alongside for the conservative reading.

Used properly, price-to-book is a question rather than an answer: what does the market believe about these assets and the returns they can earn — and is that belief justified? For a value investor the ratio's service is to point at the companies where that question is worth the time.