Price against what the books say it owns
Book value is an accountant’s figure: everything the company owns, minus everything it owes, as recorded in its accounts. Divide the share price by book value per share and you get price to book.
A ratio of 1.0 means the market values the company at exactly what its accounts say the net assets are worth. Below 1.0 means the market is paying less than the recorded value of those assets, which historically sent value investors hunting for bargains.
Visa, and a number that looks absurd
Visa has recently traded near $280 a share against book value of roughly $19 per share. Divide 280 by 19 and the ratio is close to 14.7.
Taken literally, buyers are paying almost fifteen times the accounting value of Visa’s net assets. Taken sensibly, the accounts simply do not contain the thing being bought. Visa’s value lives in a global payment network, its relationships with banks, and a brand accepted almost everywhere, and none of those appear as assets in the books because the company did not purchase them from anyone.
Rounded illustrative figures, used to make the point rather than to value the share.
Why the measure lost its grip
When this ratio became popular, the largest companies owned factories, ships and inventory, and the accounts captured most of what they were worth. Today the largest companies own software, research, data and brands, most of which never appears on a balance sheet at all.
The accounting treatment makes this worse. Buy a competitor and the premium you paid is recorded as an asset called goodwill. Build the identical capability yourself and the spending is treated as an expense, leaving nothing on the balance sheet. The company that built its own advantage looks asset-poor purely because of how the rules record it.
Where it still earns its place
Banks, insurers and property companies hold assets that are mostly financial and are marked close to their real value, so book value genuinely describes what they hold. In those industries price to book remains one of the more informative measures available, and a bank trading well below book value is saying something worth investigating.
For a software or consumer brand company, a high ratio is normal rather than alarming, and screening those industries for low price to book will mostly return businesses whose assets are the wrong kind rather than businesses that are cheap.
How to use it inside Stax
Reach for it when you are looking at financial or asset-heavy companies, and leave it alone when you are looking at asset-light ones. Applied to the whole market at once it produces a list skewed towards banks and industrial companies, which may not be the plan you intended to build.
If you do build a plan around it, test the plan rather than trusting the theory. Stax replays it across five or more years of real prices and shows every buy and sell with its reason, which is the fastest way to learn whether cheap-on-assets behaved like a bargain or like a warning.