Price-Book Ratio
Theprice-book ratiois the ratio of the market value of a share of common stock to the
book value of a share of common stock. A price-book value of 1.0 suggests that a com-
pany’s market value is equal to the balance sheet estimate of the value (book value).
Most companies would be expected to have a price-book ratio greater than 1.0. This is
because the going concern value of the company should exceed the sum of the historical
costs of the net assets. To illustrate the calculation, the market price per share of eBay
Inc., on December 31, 2004, was $116 per share. The book value per share is determined
by dividing the total shareholders’ equity (book value) by the common shares out-
standing, as shown below.Total stockholders’ equity $6,728,341,000
Common shares outstanding—basic (balance sheet date) 659,729,000Book Value per Share Total Stockholders’ Equity
Common Shares OutstandingBook Value per Share $6,728,341,000,or $10.20 (rounded)
659,729,000Thus, the price-book ratio would be:Price-Book Ratio Market Price per Share
Book Value per SharePrice-Book Ratio $116
$10.20Price-Book Ratio 11.37eBay’s market price is over 11 times greater than the book value per share. Such
large price-book ratios will occur when a company has significant unrecorded intan-
gible assets from brand name recognition, patents, or technologies. This differs from
more mature companies, where the unrecorded intangible asset values will be much
less than for young “new economy” companies. Examples of mature companies include
(price-book ratio in parentheses) Alcoa Inc.(1.91),Ford Motor Company(1.71), and
J.P. Morgan Chase(1.26).
As with most ratios, the price-book ratio can be compared to eBay’s historical
price-book ratio or with that of other firms in the Internet industry. For example,
the price-book ratios for Yahoo!andGoogleare 8 and 20, respectively. Thus, eBay’s
large price-book ratio is consistent with other Internet businesses.554 Chapter 12 Special Income and Investment Reporting Issues