Now and then I write about some stock tools, and today I will write about price to book ratio (P/B). Let`s say a stock price for company A is $10 (1 million shares). This is called the market value. Market is often investors, analysts and newspapers. But this is often not the value of the business according to its “books” or financial value.
The companies book value is calculated from the balance sheet, and it is the difference between a company’s total assets and total liabilities. This is what we call the shareholders equity. Let`s say company A has total assets of $50 million, and total liabilities is $30 million. Then the value of the company is $20 million.
If Company A sold the assets and paid the liabilities, the equity value, or the net worth of the business would be $20 million. If the stock price was trading at $10 (and they have 1 million shares), then you know that the company is undervalued. This is how it is so important to look at the P/B compared to the equity price.
Definition of price to book ratio: P/B is used to compare a stocks market value to its book value.
Value investors are searching for stocks that the market has passed by. What they are looking for is really HOT stocks. They simply look for companies that no one are paying much attention to at the beginning and that is often called penny stocks. Is is a strategy to hold the stocks for years until one day the market discovers the stocks on their screen and start to buy.
At this stage, value investors are looking for other indicators than earnings growth. What they are looking for is Price to book ratio (P/B). This measurement simply tells us the value the market places on the book value of the company.
A low P/B can indicate that the stock is undervalued, but it could also mean that it is something terribly wrong. Be aware that this ratio (like other ratios) varies from industry to industry. In addition; it tells you whether you are paying too much for what`s left in the company if it went bankrupt tomorrow.
Calculate like this:
P/B = Share Price / Book Value Per Share
The lower the P/B, the better the value. It is better to identify potential companies this way.
News today (all times are Eastern Times):
Core Durable Goods & Unemployment Claims at 8:30am,
Chicago PMI & Revised Consumer Confidence at 9:55am,
Crude Oil Inventories at 10:30am.
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