In one sentenceThe market price of a share divided by its book value, showing whether the investor pays more or less than what equity is worth in the books.
Simply put
A ratio above 1 means the market values the company at more than its net assets in the books, because of its expected earnings or hidden assets such as reputation. Below 1 may mean an opportunity or doubt about the value of the assets.
It is most useful for asset-heavy businesses, and less useful for service and technology businesses whose value lies in their people's minds, not in their assets.
Worked example
The company's share in the “Book value per share” example has a book value of 4 SAR and trades in the market at 6 SAR.
Share price6 SAR
Book value per share4 SAR
Ratio = 6 ÷ 41.5 times
Formula: Share price ÷ book value per share
Don't confuse it with
Price-to-earnings ratioThe P/E ratio compares the price with annual profit; this ratio compares it with accumulated net assets.