Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Price-to-Tangible Book Value Ratio

What it is:

The price-to-tangible book value ratio measures a company's market price in relation to its tangible book value. The ratio denotes how much investors are paying for each dollar of physical assets.

How it works (Example):

The formula for the price to tangible book value is:

Price to Tangible Book Value = Share Price / Tangible Book Value per Share

For example, let's assume that Company XYZ has 10,000,000 shares outstanding, which are trading at $3 per share. The company also recorded $15,000,000 of tangible book value last year. Using the formula above, we can calculate Company XYZ's price to tangible book value as follows:

Price to Tangible Book Value = $3 / ($15,000,000/10,000,000) = 2.0

The data needed to calculate a company's tangible book value is usually on its balance sheet.

Why it Matters:

The price-to-tangible book value ratio excludes the book value of a company's intellectual property and other intangible assets, such as patents and goodwill. As such, it represents what debtholders or investors would receive if the company liquidated its physical assets (assuming that it could get book value for all of those assets). 

If a stock is trading below its tangible book value per share, analysts might consider the company undervalued because investors would receive more than the share price if the company were to liquidate. Likewise, if a company is trading above its tangible book value (as is the case in our example), investors could be left holding the bag if the company has to liquidate.