Educational material from 
What you will learn
- Calculate equity as reported assets minus liabilities.
- Separate book equity per share from share price and market capitalisation.
- Calculate P/B and explain why it does not provide a certain buy or sell signal.
Begin with two separate sets of information
The company’s reported assets are SEK 90,000 and its liabilities are SEK 30,000. Equity is therefore SEK 60,000. There are 1,000 ordinary shares outstanding. In this simple model, book equity per share is 60,000 ÷ 1,000 = SEK 60.
At the same time, the fictional market price is SEK 90 per share. Market capitalisation is 90 × 1,000 = SEK 90,000. That is the value of the shares at our stated price. It differs from the accounting measure of total assets, even though those two numbers happen to be equal in this example.
If the table does not fit, scroll it sideways.
| Measure | Amount |
|---|---|
| Assets | SEK 90,000 |
| Liabilities | SEK 30,000 |
| Equity | SEK 60,000 |
| Equity per share | SEK 60 |
| Share price | SEK 90 |
| Market capitalisation | SEK 90,000 |
P/B compares price with book equity
P/B stands for price/book. In our model the ratio is share price divided by book equity per share: 90 ÷ 60 = 1.5. You get the same result from 90,000 ÷ 60,000, or market capitalisation divided by equity. Make sure the total equity and share count relate to the same owners.
P/B of 1.5 describes the relationship between two given measures. It does not mean accounting has set a certain fair price or that the share is automatically expensive. Book equity is also different from a cash balance that each owner can withdraw from the company.
The ratio can change without a new share price
In a separate simplified scenario, an asset is written down by SEK 10,000. Assume liabilities and the share count are unchanged and no other items change. Assets become SEK 80,000 and equity becomes SEK 50,000. Equity per share is now SEK 50.
If the price remains SEK 90, P/B becomes 90 ÷ 50 = 1.8. The share price has stayed still while accounting information changed the ratio. The scenario isolates an accounting effect; it does not try to predict how a real stock market responds to a write-down.
A reported amount is no guaranteed sale proceeds
Assets and liabilities are reported using rules and assumptions. Selling assets in an actual liquidation could produce different amounts and costs. A balance sheet also describes a point in time. Read the notes and date instead of treating the figure as a promise of cash from a future sale.
With zero or negative book equity, the ratio needs a different interpretation; conventional positive division is no longer useful in the same way. Begin by understanding the balance-sheet items, then use the company-search guide to practise finding the right identity and underlying information.
Try it yourself
A fictional company has assets of SEK 75,000, liabilities of SEK 25,000 and 2,000 ordinary shares. The price is SEK 20 per share. Calculate equity, equity per share, market capitalisation and P/B in our model.
Show the solution and explanation
Equity: SEK 50,000. Equity per share: SEK 25. Market capitalisation: SEK 40,000. P/B: 0.8.
75,000 − 25,000 = 50,000. Then 50,000 ÷ 2,000 = 25. Market capitalisation is 20 × 2,000 = 40,000. P/B is 20 ÷ 25 = 0.8, equal to 40,000 ÷ 50,000. A ratio below 1 does not establish that the share is a bargain.
Check your understanding
Is book equity per share equal to the market share price?
No. Our first example has book equity of SEK 60 per share and a price of SEK 90.
Must a P/B change result from a price change?
No. The write-down scenario keeps the price unchanged while equity per share moves from SEK 60 to SEK 50.
Practise with virtual money
Try what you just learned in a practice portfolio with virtual money. You don't deposit any real money.
How the practice portfolio worksKeep learning and practising
More lessons on this topic
Ratios and compound growth
Sources and examples
- SEC: earnings, shareholders’ equity and the P/E ratio
- OpenStax: book equity per share and market-value ratios
The sources support the factual explanations. Calculations and exercises were created for this lesson. Amounts and price changes are invented unless stated otherwise.
This material is educational and does not recommend securities to buy. A simulated result does not guarantee a future result.
