The Price-to-Book ratio (P/B), or book value multiple, divides the market value of equity (market capitalisation or negotiated equity value) by its accounting value (balance sheet equity). It measures the premium the market assigns to the company's net assets — reflecting unrecognised intangible assets, future profitability prospects and management quality. A P/B above 1 indicates the market values the company above its net accounting assets.

The P/B is particularly relevant for companies whose value is primarily anchored in balance sheet assets — banks, insurance companies, real estate companies, financial holdings — for which EBITDA multiples are less meaningful. The theoretical relationship between P/B and ROE is: P/B = (ROE - g) / (Ke - g). This relationship validates valuation assumption consistency: if a company shows ROE of 15%, Ke of 10% and g of 2%, theoretical P/B is (15% - 2%) / (10% - 2%) = 1.63x.

Example: a Swiss financial company shows equity of CHF 12.0 million and net income of CHF 1.8 million (ROE = 15%). Estimated Ke: 10%. Terminal g: 2%. Theoretical P/B = (15% - 2%) / (10% - 2%) = 1.63x. Equity value = 1.63 × CHF 12.0M = CHF 19.5M — consistent with the earnings multiple (CHF 1.8M × 10.8x P/E = CHF 19.4M).

At Hectelion, we use the P/B ratio as a consistency indicator in our valuations of asset-heavy or financial companies, systematically linking it to ROE and cost of equity.