Since the father of value investing, Benjamin Graham, one of the most important tools for understanding a stock's true value has been the **P/B ratio (Price-to-Book)**. This ratio, which measures the relationship between market value and book value, is a critical indicator particularly for investors selecting stocks on BIST. In this article, we will explain in detail what the P/B ratio means, how it is calculated, and how it should be interpreted in the BIST context.
What Is the P/B Ratio?
The **P/B ratio (Price-to-Book)** represents the ratio of a company's market capitalization to its book value of equity on the balance sheet. This ratio shows how much premium or discount the market applies to a company's assets.
Book value is the **shareholders' equity** calculated by subtracting total liabilities from total assets on the balance sheet. Simply put, if the company sold all its assets and paid off all its debts today, the theoretical amount remaining for shareholders is the book value.
How Is the P/B Ratio Calculated?
The calculation can be done two ways. First, using total values:
**P/B = Total Market Capitalization / Total Shareholders' Equity**
Second, using per-share values:
**P/B = Share Price / Book Value Per Share**
A Practical Example on BIST
Suppose SISE (Sisecam) has a market cap of 80 billion TL and shareholders' equity of 60 billion TL on its balance sheet. Then P/B = 80 / 60 = 1.33. This means the market is assigning a 33% premium to Sisecam's book value. Investors are willing to pay above book value because of the company's intangible assets (brand value, know-how, market position).
How to Interpret the P/B Ratio
The key reference point for interpreting the P/B ratio is 1.0. Values above and below this threshold imply different things:
- **P/B < 1:** The market is pricing the company below its book value. This can be a potential signal of undervaluation. However, if the company's assets are losing value or profitability is low, the market may be correct.
- **P/B = 1:** Market value equals book value. The company is trading exactly at its balance sheet value.
- **P/B > 1:** The market is assigning a premium to the company's book value. High profitability, strong brand, and growth potential make this normal.
- **P/B > 3–4:** Very high premium. This is typically seen in technology or fast-growing companies with few tangible assets.
The Role of P/B in Value Investing
The value investing strategy popularized by Benjamin Graham and later Warren Buffett fundamentally aims to **find stocks that the market has mispriced**. Low P/B stocks are one of the most important screening criteria in this approach.
Academic research has shown that low P/B stocks outperform high P/B stocks over the long term. In Fama and French's three-factor model, the **value factor (HML — High Minus Low)** measures precisely this effect. This factor has also been observed to produce a strong return premium on BIST historically.
borsafolio.com's factor portfolios systematically apply the P/B-based value strategy to BIST stocks. You can quickly identify value stocks in the stock screener using the low P/B filter.
Sector Differences in P/B
The P/B ratio varies widely across sectors. Cross-sector comparisons must therefore be made with caution.
- **Banking:** Banks like GARAN and AKBNK typically trade in the 0.5–1.5 P/B range. Since bank assets are largely financial instruments, book value is more meaningful.
- **Industrials:** Industrial companies like EREGL and SISE generally have P/B ratios of 1–3. Tangible asset intensity is high.
- **Technology and Defense:** Companies like ASELS can have higher P/B ratios because intangible assets (R&D, patents, human capital) are not fully reflected on the balance sheet.
- **Retail:** Retail giants like BIMAS can command market values well above book value due to brand value and operational efficiency.
Limitations of the P/B Ratio
Like any financial ratio, P/B has its limitations. Knowing these is critical for sound investment decisions.
First, **book value may not fully reflect true value**. Under accounting standards, many assets are recorded at historical cost. In high-inflation countries like Turkey, book values can diverge significantly from reality during periods when inflation accounting is not applied.
Second, **intangible assets** are generally underrepresented on the balance sheet. A company's brand value, customer base, and R&D know-how do not appear on the balance sheet. This makes P/B alone potentially misleading in service and technology sectors.
Third, the P/B ratio becomes meaningless when there is **negative shareholders' equity**. Companies whose accumulated losses exceed their equity cannot use this ratio.
The P/B and ROE Relationship
Rather than evaluating P/B in isolation, considering it alongside **Return on Equity (ROE)** is far more meaningful. It is normal for a company generating high ROE to trade at a high P/B, because it is using its equity efficiently. The truly attractive opportunity lies in stocks that trade at **low P/B despite high ROE**.
This relationship can also be expressed mathematically: **P/B = ROE × P/E**. Therefore, using the P/B and ROE filters together in borsafolio.com's stock screener lets you systematically identify strong value investing candidates.
Summary
How to Screen for Low P/B Stocks
You can follow a systematic screening process to find low P/B stocks on BIST. Start by filtering for stocks with P/B below 1. Then, among these, select those with positive and reasonable ROE. Finally, check leverage ratios to identify financially sound companies. This three-layer filter significantly reduces your risk of falling into a value trap.
In borsafolio.com's stock screener, you can easily perform this screening by combining the P/B filter with ROE and leverage filters. Repeating screening results across different periods lets you identify companies that consistently trade at low P/B while maintaining profitability.
The P/B ratio is one of the cornerstones of value investing. This ratio, which shows how the market prices a company relative to its book value, is a reliable valuation tool especially in asset-intensive sectors and banking. However, it is not sufficient on its own; it delivers the most accurate results when used alongside ROE, P/E ratio, and sector comparisons. When selecting stocks on BIST, consider P/B as an important part of your toolkit — but not your only tool.
Related articles: Fundamental Analysis Guide, What Is P/E Ratio?, Financial Statement Analysis, Stock Valuation Methods, BIST Stock Screening Guide, BIST Sector Analysis, Sharpe Ratio Guide.
