What Is the Price-To-Book Ratio (P/B Ratio)?

The price-to-book (P/B) ratio has been favored by value investors for many years and is widely employed by market analysts

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Traditionally, any value under 1.0 is taken into account an honest P/B value, indicating a potentially undervalued stock. However, value investors often consider the stocks with a P/B value under the 3.

 it's important to notice that it is often difficult to pinpoint a selected numeric value of a "good" P/B ratio when determining if a stock is undervalued and thus, an honest investment.

Ratio analysis can vary by industry and an honest P/B ratio for one industry could also be a poor ratio for an additional.

The Basics of the P/B Ratio

The P/B ratio compares a company's market capitalization, or market price, to its value. Specifically, it compares the company's stock price to its value per share (BVPS).

The market capitalization (company's value) is its share price multiplied by the number of outstanding shares. The value is that the total assets - total liabilities and may be found during a company's record.

In other words, if a corporation liquidated all of its assets and paid off all its debt, the worth remaining would be the company's value.

It is helpful to demonstrate some common factors for P / B value, then consider various other factors and valuation measures that more accurately interpret the P / B ratio and estimate the company's potential growth.

Formula P/B Ratio

 The ratio is calculated as follows.

“P/B Ratio = Market Price per Share / Book Value per Share”

“Book Value per Share= (Total Shareholder Equity - Preferred Equity) / Total Outstanding Shares”

 P/B Ratio to gauge Stock

The P/B ratio shouldn't be used as one evaluation of stock because, while a coffee P/B may mean an undervalued company, it also can be a result of serious underlying problems within that company.

A weakness during a P/B Ratio evaluation is that it fails to think about things like future earning prospects or intangible assets.

However, the P/B ratio helps to spot hyped-up companies that have surging stock prices with no assets.

Other potential problems with using the P / B ratio stem from the fact that recent acquisitions, anything such as recent write-offs or Share buybacks may distort the price figure within the equation.

In examining undervalue stocks, investors should consider several valuation measures of the P / B ratio.

One measure commonly used is the return on equity (ROE) which indicates what proportion profit a corporation generates from shareholders' equity.

P / B ratios and ROEs are generally well correlated, and any large discrepancy between them may be a cause for concern.

The Line of Bottom

Investors may find the P/B ratio to be a useful metric because it can provide an honest thanks to comparing a company's market capitalization to its value.

But determining a typical and acceptable price-to-book ratio isn't easy. As mentioned above, this varies by industry.

In some cases, a lower P/B ratio could mean the stock is undervalued, but it's going to also point to fundamental problems with the corporate.