P/B (P/Bv or price-to-book) ratio shows how expensive stock is compared to its books value. Company’s book value (also called equity, capital, shareholders funds etc.) is equal to company’s total assets less total liabilities.
This ratio is an easy one to calculate, but not an easy to make it work. Most of the times, when company has high ROE (that means is very profitable) P/B ratio will be useless. In such cases price-to-book is very high (>2-3), and doesn’t provide any interesting information.
However, P/B ratio might interesting when is very low. We may start to pay attention to this ratio when it is lower than 1 for selected investment. P/B ratio in many cases may be 0.3, 0.2, 0.1 or even lower. Such numbers are low for P/B, but low ratio doesn’t necessarily mean that stocks with low book value ratio is a proper investment.
P/B ratio should show what return investors could get from company in case of liquidation. But it is not the only case. Return may come in vary ways, but the main thing is to be sure about the real value of assets, because book value might be very far from it.
Price-to-book ratio is popular for banks’ valuation, because banks have high asset turnover and their assets are more liquid and more close to market value.
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