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Sunday, November 2, 2014

Price to Book Value ratio

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Price to Book Value ratio

 

 

·         Book Value is the total value of the company's assets that equity shareholders would get if a company were to be liquidated. Book value is the actual value of a company when all liabilities are deducted from its assets and equity. It values the company based on its net assets value. The market-cap of the company is compared with its book value to evaluate whether a stock is undervalued or overvalued. Since the book value is less volatile compared to company's profits and dividends, price to book value ratio is one of the more reliable ratios.

How to interpret Price to Book Value ratio

The ratio determines whether a stock is undervalued or overvalued. Ratio of 1 or less than1 indicates that a company is either undervalued or it is in a declining business. Ratio of more than 1 indicates that a company is either overvalued or the market is willing to pay higher premium above company's assets. Price to book value ratio may differ for various sectors. Private banks quote at a higher price to book value ratio compared to public sector banks. However, asset quality of private banks is far superior compared to public sector banks. One should not consider negative price to book value ratios during analysis.

Formula

Price to Book Value = Current Market Price Book value per share Book Value = (Total Assets Intangible Assets & Liabilities) Total equity shares

Example

Current market Price Rs 100 Book Value per share: Rs 200 P/BV: 0.5 (100/200)



 

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