What it is
P/B compares share price to book value per share (total equity ÷ shares outstanding). A P/B of 1 means the market values the company at exactly its accounting net worth.Graham's rule
Benjamin Graham, Buffett's teacher, looked for P/B < 1.5 as a defensive criterion. A P/B below 1 was his "net-net" zone — buying at less than liquidation value, with built-in margin of safety.When P/B works (and when it doesn't)
Works well for: banks, insurance companies, utilities, real estate — businesses where the balance sheet captures most of the value.Misleading for: software, brands, services — businesses where most of the value is intangible. Microsoft's software code, Coca-Cola's brand, Visa's network — these don't show up on the balance sheet, so P/B looks artificially high.
Pitfalls
- Goodwill from acquisitions inflates book value without reflecting any real asset
- Buybacks shrink book value, making P/B look higher even when nothing changed economically
- Recent stock-based compensation and write-downs distort P/B in tech/biotech