For almost thirty years Warren Buffett opened Berkshire Hathaway’s annual letter with the change in book value per share. It was the company’s scorecard, and it was written into policy: the buyback program forbade repurchasing stock above a 20% premium to book.
On July 17, 2018 the board deleted that ceiling. In the letter that followed, Buffett retired book value as the headline measure altogether, explaining that it had lost the relevance it once had. When the investor most associated with a metric abandons it, the reasons are worth understanding, because they apply to almost every company that reports one.
What Book Value Records
Price-to-book = market capitalization ÷ shareholders’ equity, or equivalently share price divided by book value per share.
The SEC describes shareholders’ equity as what would remain if a company sold every asset and paid off every liability, which follows from the balance-sheet identity it also sets out: assets equal liabilities plus shareholders’ equity. Book value is a residual, not a measurement.
The word residual is doing real work there. Equity is not calculated by valuing the business; it is whatever is left after subtracting one recorded number from another. A ratio of 1.0 means the market is paying exactly the accounting value of the net assets.
Below 1.0 the market is paying less than the balance sheet says the company is worth on paper.
Above it, the market is paying for something the balance sheet does not contain.
That last case is now the overwhelming majority, and the reasons are structural rather than a matter of sentiment.
Buffett Retired the Metric He Made Famous
The 2018 letter, published in February 2019, sets out the defect precisely. Berkshire holds two very different kinds of asset, and accounting treats them incompatibly.
The asymmetry inside Berkshire’s own accounts
Marketable stocks are carried at market prices, so their book value updates continuously. Wholly owned operating businesses are carried at historical book value, frozen far below what they are worth. As Berkshire shifted over decades from being primarily a holder of securities to primarily an owner of operating companies, a growing share of its value became invisible to the very metric it reported.
The book value figure was not becoming inaccurate. It was becoming irrelevant, and it was doing so gradually enough that nobody had to notice.
Why buybacks made the distortion worse
Buffett identified a second problem that bites at any company repurchasing stock. A buyback executed above book value but below intrinsic value mechanically reduces book value per share while increasing intrinsic value per share.
The two measures move in opposite directions from the same transaction, and the transaction is the correct one. A company doing exactly the right thing for its owners would report a deteriorating book value per share, which is an unusually clean demonstration that the metric had stopped tracking what it was supposed to track.
The board’s decision on July 17, 2018 to remove the 20% ceiling followed directly. A rule tying repurchases to book value had become a rule tying them to a number management no longer considered meaningful.
Where the Market’s Multiple Now Sits
The aggregate picture shows the same drift. As of the close on September 2, 2026, the S&P 500 traded at a price-to-book ratio of 6.09.
The index trades at roughly twice its historical average multiple of book. One reading is that equities are expensive. Another is that the denominator has become progressively less representative as the economy shifted toward businesses whose value sits in software, brands and research rather than in factories.
There is also a mechanical lag to allow for. Reported book value trails the market price by roughly a year, so a current ratio compares today’s price against a balance sheet from several quarters ago. In a fast-moving market that alone moves the number.
A price-to-book ratio is never as current as it looks. The numerator updates by the second and the denominator updates quarterly, with a reporting lag on top. For a company whose equity is changing quickly through buybacks or losses, the published ratio can be materially stale.
The Companies Where the Ratio Simply Fails
Book value can go below zero, and when it does the ratio stops producing meaningful output. This is not rare, and it does not indicate distress.
Boeing’s deficit had widened from $15,883 million a year earlier, driven by sustained operating losses. Starbucks and McDonald’s arrived at negative equity by an entirely different route: decades of returning more cash to shareholders through buybacks and dividends than they retained as earnings.
The distinction matters and the ratio cannot express it. One company has negative equity because it lost money; two have it because they gave money back from businesses that never stopped earning. All three produce the same broken output, and a screen filtering on price-to-book would treat them identically.
Dividing a positive market capitalization by negative equity produces a negative ratio, which reads as though the market values the company at less than nothing. It does not. The ratio has simply broken, exactly as return on equity does for the same companies and for the same reason.
Why Internally Built Value Never Reaches the Balance Sheet
The deepest problem is not measurement error. It is that accounting rules require most of what modern companies invest in to be expensed rather than recorded as an asset.
Alphabet’s own annual report states that it expenses software development costs incurred before technological feasibility is reached, and that amounts qualifying for capitalization have been immaterial. The company spent $61,087 million on research and development in 2025, equal to about 15% of the $415,265 million of total stockholders’ equity on its balance sheet.
In a single year, Alphabet spent the equivalent of roughly a seventh of its entire book equity on research that produced no asset in the accounts. Repeat that for a decade and the gap between book value and what the company actually owns becomes enormous, without any accounting impropriety at all.
The goodwill asymmetry
Now consider the same value acquired rather than built. Intangible value purchased through an acquisition is capitalized, capitalized as goodwill and identifiable intangibles.
The consequence is a genuine distortion in cross-company comparison. Two firms with identical technology can report very different book values purely according to whether they developed it internally or bought it. The acquirer looks asset-rich and posts a lower price-to-book; the innovator looks asset-poor and posts a higher one. Neither number describes which company has better technology.
Before drawing any conclusion from a price-to-book ratio, ask what fraction of the company’s productive capacity would appear on a balance sheet at all. For a bank or a property company, most of it. For a software or pharmaceutical business, very little. The ratio is informative in the first case and close to meaningless in the second.
Where the Ratio Still Earns Its Place
None of this makes price-to-book useless. It makes it specific to a narrow set of companies.
It works where assets are financial, liquid, and carried at or near market value. Banks are the clearest case: their assets are loans and securities, marked with some regularity, and book value is a reasonable approximation of what the business holds. Insurers, closed-end funds and real estate companies fall into the same category for similar reasons.
It also retains value as a floor indicator in distress. A company trading below book is being priced by the market at less than the stated worth of its net assets, which is either an opportunity or a signal that the assets are overstated and impairments are coming.
Both are worth investigating, and the March 2009 index low of 1.78 marks the last occasion the whole market traded near that territory.
A caveat even there: a company trading below book for years is usually being told something by the market rather than overlooked by it. Persistent sub-1.0 valuations cluster in industries where the recorded asset values are genuinely doubtful, and the ratio is flagging the doubt rather than the bargain.
The third use is longitudinal rather than comparative. Tracking one company’s price-to-book against its own multi-year range says something, because the accounting policies stay constant even when they are unrepresentative.
What the Ratio Cannot Do
- It cannot compare asset-light with asset-heavy businesses. The denominator means different things in each case.
- It ignores internally generated intangibles entirely. Alphabet’s $61 billion of 2025 research spending created no balance-sheet asset.
- It penalises the innovator relative to the acquirer. Bought intangibles are capitalized; built ones are expensed.
- It breaks completely at negative equity. Boeing, Starbucks and McDonald’s all report equity below zero.
- It is distorted by buybacks. Repurchases above book reduce book value per share even when they add value, as Buffett demonstrated.
- It lags. A quarterly denominator against a real-time numerator, with a reporting delay of roughly a year in the index-level figure.
The Bottom Line
Price-to-book compares what the market will pay against what the accounts say a company owns, and the second half of that sentence has been getting weaker for decades. Balance sheets were designed for businesses whose value sat in physical assets, and most of the value in the current index does not.
Use it for banks, insurers and property companies, where the denominator means something. Use it as a distress signal when a company trades below 1.0, and investigate rather than assume. Use it against a single company’s own history. Do not use it to rank a software business against a manufacturer.
Buffett spent nearly three decades reporting book value and then stopped, in writing, with reasons. That is a stronger argument against over-relying on the ratio than any critique from outside the accounts.
For the ratio that fails on the same companies, see return on equity; for a measure that includes debt, see enterprise value; for the repurchases that shrink book value, see outstanding shares.
