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# Price to Book Value Analysis

Modified on 2012/08/16 12:38 by swathen Categorized as Uncategorized
Financial Ratios
Price Earnings Ratio
Price to Sales Ratio

# Price to Book Value Analysis¶

Price to Book Value Definition

Price to book ratio (PBV ratio or P/B ratio) expresses the relationship between the stock price and the book value of each share. In general, the lower the PBV ratio, the better the value is. However, the value of the ratio varies across industries. A better benchmark is to compare with industry average.

Price to Book Value Formula

Price to book value = Market Cap ÷ book value

Price to Book Value Calculation

Book value is the value of the company if all liabilities were subtracted from assets and common stock equity.

Example: assume \$ 20,000 in market cap and \$ 10,000 in book value.

Price to book value = 20,000 / 10,000 = 2

This means that investors pay \$2 for every dollar of book value that a company has.

Applications

Price to book value ratio measures whether or not a company’s stock price is undervalued. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. The value of 1 or less means either a company is undervalued or the company is in a declining business. Although Price to book value ratio gives investors some idea of how expensive a company’s stock is, it provides very limited information for some industries with hidden assets which are of great value, but not reflected in the book value.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.