Price-to-Book Ratio Formula & Example What is Price-to-Book Ratio?

calculate the book

Dividing that $1 billion by the 100 million What Is Considered a Good Price-To-Book Ratio? shares gives us a per-share book value of $10. Finally, we divide the current share price of $15 by that $10 to reach a price-to-book multiple of 1.5. P/B provides a valuable reality check for investors seeking growth at a reasonable price. P/B is often looked at in conjunction with return on equity , a reliable growth indicator.

Is a high or low price-to-book ratio good?

The lower a company's price-to-book ratio is, the better a value it generally is. This can be especially true if a stock's book value is less than one, meaning that it trades for less than the value of its assets. Buying a company's stock for less than book value can create a "margin of safety" for value investors.

That’s because a manufacturer will have a lot more assets on the books, than, say, a services company. Or a trucking operation will have more overhead expenses than an online bank.

High Price-Earnings Ratio

Both are good ratios to be used collaboratively though, because they expose different aspects about a company. Price-to-book ratios can be helpful when deciding where to invest if you follow a value strategy. While a P/B ratio alone may not be the most reliable measure of a company’s value and financial health, it can offer valuable insight into where a stock may be headed.

  • We also reference original research from other reputable publishers where appropriate.
  • A value investing strategy focuses on finding companies that have solid return potential but may be overlooked by the broader market.
  • Allowing for the higher leverage and risk in Jenapharm, a beta of 1.25 was used for Jenapharm.
  • However, these targets are mostly arbitrary and are not relevant for all companies.
  • Finally, the book value can become negative because of a long series of negative earnings, making the P/B ratio useless for relative valuation.
  • By purchasing an undervalued stock, they hope to be rewarded when the market realizes the stock is undervalued and returns its price to where it should be—according to the investor’s analysis.

The P/B has been favored byvalue investorsfor decades and is widely used by marketanalysts. Traditionally, any value under 1.0 is considered desirable for value investors, indicating an undervalued stock may have been identified. However, some value investors may often consider stocks with a less stringent P/B value of less than 3.0 as their benchmark. Again, in this valuation, we have preserved consistency by setting the growth rate equal to the product of the return on equity and the equity reinvestment rate (1- FCFE/ Earnings).

Motley Fool Investing Philosophy

While the P/S ratio is advantageous in that it’s still useful even if companies are operating at a loss, this ratio, compared to P/B and P/E, is more easily manipulated and misleading. Depending on the true profitability of a company, sales could be worth a little or a lot. For example, a company could be making billions in sales, yet lose money on every transaction- but the P/S ratio won’t tell you this. It is quite easy to calculate a company’s P/B ratio by using its balance sheet and income statement. Another important thing to note about the price-to-book ratio is that its usefulness can be determined by the company itself. If you’re evaluating a company that has mostly intangible versus tangible assets, then it can be more difficult to get a true sense of book value and, in turn, the price-to-book ratio.

What is the average price-to-book ratio?

The average P/B ratio for banking firms, as of the first quarter of 2021, is approximately 1.28. P/B is sometimes calculated as an absolute value, dividing a company's total market capitalization by the book value from the company's current balance sheet. The calculation is sometimes done on a per-share basis.

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