Why can justified price-to-book be greater than one even if book value already represents shareholder equity?

Investors pay more than book value when they expect management to earn returns on that equity base above the required return.

Book value tells you what capital is in place. Justified P/B tells you what that capital is worth given expected profitability.

If fictional manufacturer Crestline Sensors has book value per share of 25 and is expected to earn an ROE of 16% while investors require only 10%, the firm is generating positive residual income. Each dollar of book equity is expected to produce more than the return shareholders demand, so each dollar of book value is worth more than one dollar in market value.

The intuition is:

• ROE > required return -> value creation -> P/B > 1
• ROE = required return -> no excess value creation -> P/B ≈ 1
• ROE < required return -> value destruction -> P/B < 1

So justified P/B is not contradicting book value. It is a market judgment about the quality of returns earned on that book value.