Tag Archives: Book value

Price to book ratio (P/B)

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.

shinybull_for_sitesite-7

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Bullish Bullish Bullish

It`s optimism in Asia, and all the indices are up. All this of course because of the good news we all got from the Capitol Hill yesterday. They came to an agreement only two hours before the deadline, and now the can rise the limit and borrow more money.

The shutdown is also over and one million people can get back to work again. The agreement is only for a short periode of time. Desember 13 is the next date for a new agreement. That is for an agreement in a long run.

Stocks went up in the US after the good news and gold is up too. VIX is down 21,17%. Many hedgefunds have lost a lot of money yesterday. Right now gold is trading at $1306,10. So, what am I suppose to do now, you said? Well, as I have told you before, in the US, the P/E (price/earnings) is 20, which means Europe is a better bet, because P/E in Europe is 10.

Where do you find the bullish stocks, and when are you getting in, and when are you getting out. Many have asked me about that, and this is the point where many are struggling. Let`s look at the chart for Microsoft and Apple.

Msft and Aapl

If you bought those two stocks in the 80`s, you would have a huge gain today. But who is sitting on their stocks for 30 years? If you bought Microsoft in 2000, you would have lost your money today. If you bought Apple 10 years ago you would have a huge gain today. When to go in and out of a stock is sometimes difficult.

Many investors tend to remember the losing trades much better than the winning trades. It`s all about feelings when it comes to invest money. If you lose money you can get so nervous that it will be impossible to make good decisions again. The mere thought of losing money blocks the opportunity you have in the market.

Controlling emotions is very important when you are investing money in the market, because emotions can play havoc with your investing. That`s why you need to have a plan that makes you prepared no matter what happens in the market.

Emotional investors usually do wrong decisions and there is many of them. If you are one of them, it doesn`t mean you can be a successful investor. It simply means you have to acknowledge your concerns.

First of all you need a plan. Before you buy stocks you need to have a selling plan. You have to decide at what point you want to sell the stock. Stocks goes up and down, and you need to consider how low you think the stock might fall. Professional investors do always set a “stop loss”.

How much money can you affort to lose? 10%? 20? More? You must find your exit strategy. With a plan in your hand you can take away your emotions, and better understand when to avoid holding the stock too long or when to selling the stock to early.

You do not want to lose money. Nobody does that. If you want to buy and hold, and sit on the stock for a long time, you don`t want to exit out prematurely, but you do not want to see a great gain disappear either if a stock begins a sustained downward plunge.

The pros often use trailing stops and stop loss orders. These strategy will help you to protect your investments against losses. These strategies will not give you a guarantee to profit or protect you against an absolute losses, but it will help you to control your emotions to make betters decisions, which means better investments over time, so stick to your plan.

A Price to book ratio (P/B ratio) is used to compare a stock`s market value to its book value. It is calculated by dividing the current slosing price of the stock by the latest quarter`s book value per share, also known as the «price-equity ratio».

A stock is undervalued if the P/B is very low. But it can also be a warning that it is something wrong with the company. This ratio also gives you an idea of whether you`re paying too much for what would be left if the company is bankrupt tomorrow.

If you look at all the companies and shares in S&P 500, you will also find a P/B for that index. A very useful technique that tells you how cheap or expensive the stocks are right now. Take a look at the chart I have added today. This chart will give you a picture of the situation a the moment.

PB value

Current S&P 500 Price to Book Value: 2,53 +0,03 (1,38%)

Wed Oct 16

Mean: 2.75
Median: 2.73
Min: 1.78 (Mar 2009)
Max: 5.06 (Mar 2000)

Current price to book ratio is estimated based on current market price and S&P 500 book value as of June 2013 — the latest reported by S&P.

News for today: Unemployment Claims at 8:30am, Philly Fed Manufacturing Index at 10:00am.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Filed under Stock market, Stocks