Book Value Multiples

The relationship between price and book value has always attracted the attention of investors. Stocks selling for well below the book value of equity have generally been considered undervalued, while those selling for more than book value have been targeted as overvalued. This chapter begins by examining the price–book value (PBV) ratio in more detail, the determinants of this ratio, and how best to evaluate or estimate the ratio.

In the next part of the chapter, we turn our attention to variants of the price-to-book ratio. In particular, we focus on the value-to-book ratio and Tobin's Q—a ratio of market value of assets to their replacement cost.


The market value of the equity in a firm reflects the market's expectation of the firm's earning power and cash flows. The book value of equity is the difference between the book value of assets and the book value of liabilities, a number that is largely determined by accounting conventions. In the United States, the book value of assets is the original price paid for the assets reduced by any allowable depreciation on the assets. Consequently, the book value of an asset generally decreases as it ages. The book value of liabilities similarly reflects the at-issue values of the liabilities. Since the book value of an asset reflects its original cost, it might deviate significantly from market value if the earning power of the asset has increased or declined significantly since its ...

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