Price-to-Book and Dividend Yield
P/B shows how much you pay for each $1 of net assets; dividend yield shows how much cash you get back each year. Read both alongside ROE and the payout ratio so you don't fall into a "cheap" trap.
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Text version · Fundamental Analysis, lesson 8: “Price-to-Book and Dividend Yield”
P/B shows how much you pay for each $1 of net assets; dividend yield shows how much cash you get back each year. Read both alongside ROE and the payout ratio so you don't fall into a "cheap" trap.
P/B: how much you pay for net assets
P/B ratio = share price ÷ book value per share. Below 1 means the price is below the book value of net assets. It might be genuinely cheap, or the assets might be poor quality and earn very little.
P/B = P/E × ROE
A company with a high ROE deserves a high P/B. With ROE at 10% and a P/E ratio of 10, P/B is 1; with ROE at 25% and a P/E of 30, P/B is 7.5.
Dividend yield and payout ratio
dividend yield = dividend per share ÷ share price: the cash you get back each year if you buy at today's price. payout ratio = dividends ÷ net income: it tells you whether that cash can keep coming.
Watch out for value traps
When collapsing profits send the share price tumbling, the dividend yield based on the old dividend looks high and the P/B looks low. The numbers are cheap, but the business is getting worse. That's a value trap.
Key takeaways
- P/B ratio = share price ÷ book value per share, and P/B = P/E × ROE: high-ROE companies deserve a higher P/B.
- Dividend yield = dividend per share ÷ share price; payout ratio = dividends ÷ net income.
- A payout ratio above 100% means paying out more than it earns, so a high dividend is often hard to sustain.
- A share price crash makes the dividend yield and P/B "look" cheaper. First check whether profits and dividends can hold up, and avoid value traps.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Default “Steady bank”: what are the P/B, ROE, dividend yield and payout ratio?
- Switch to “High-growth tech”: why is the P/B as high as 8×? Check it with “P/E × ROE”.
- Switch to “Value trap”: the dividend yield is high, but what's the payout ratio? What does the explanation card say?
- Go back to “Steady bank” and drag the share price from $9 to $4.5: what do the dividend yield and P/B become? Did the company itself change?
Quiz and explanations
- 1. The share price is $30 and book value per share is $20. What's the P/B ratio?
- Answer: 1.5.$30 ÷ $20 = 1.5.
- 2. The share price is $40 and the annual dividend is $1.6 per share. What's the dividend yield?
- Answer: 4%.$1.6 ÷ $40 = 4%.
- 3. EPS is $1, the dividend is $1.5 per share, and the dividend yield is 9%. What's the biggest warning sign?
- Answer: A 150% payout ratio, so the dividend is hard to sustain.The dividend is 1.5 times profit, so it can only be paid from savings or borrowing, and could be cut at any time.
Terms in this lesson
- book value per share (Book Value per Share): Shareholders' equity ÷ total shares: how much book value backs each share.
- dividend yield (Dividend Yield): Annual dividend per share ÷ share price: how much you'd get back in cash each year buying at today's price.
- EPS: Net income ÷ total shares: how much profit each share earns.
- payout ratio (Payout Ratio): Dividends ÷ net income: how much of the profit goes to shareholders; staying above 100% means paying out more than it earns, which can't last.
- P/B ratio (P/B Ratio): Share price ÷ book value per share: what you pay for each $1 of book value; P/B = P/E × ROE.
- P/E ratio (P/E Ratio): Share price ÷ earnings per share: what you pay for each $1 of annual profit; a high P/E means the market expects faster growth.
- ROE (Return on Equity): Return on equity: net income ÷ shareholders' equity, or how much each $1 shareholders put in earns in a year.
- value trap (Value Trap): A stock that looks cheap on valuation (low P/E, low P/B, high dividend yield) because the business is getting worse, so it may stay cheap.