What is Price to Book Value Ratio

Overview

Price to Book Value ratio is used in fundamental analysis of the company’s health. This ratio compares the company’s market value to its book value, to indicate whether a company’s stock is undervalued or overvalued. It is also known as Price to Equity Ratio.

What Is the Price to Book Value in the Stock Market?

Price to book (P/B) value ratio in the stock market is a financial ratio that compares a company's market price per share to its book value per share. 

It's calculated by dividing the market price per share by the book value per share. The P/B ratio provides insight into whether a stock is undervalued or overvalued by comparing the market's perception of the company's value (market price) to its actual net worth (book value). 

A P/B ratio below 1 indicates the stock may be undervalued, while a ratio above 1 suggests overvaluation.

How to Find Price to Book Value

The formula for the price-to-book (P/B) value ratio is quite simple and is calculated as follows:

Step 1: Calculate the book value per share.

Step 2: Determine the market price per share.

Step 3: Divide the market price per share by the book value per share to get the P/BV ratio.

Price to Book Value Calculation

Let Us Calculate the P/BV of a Company with the Following Information:

Book Value per Share = Net worth 

---------------------------------------

Number of shares outstanding 

  = (Rs. 10 Lakhs + Rs. 50 Lakhs)/ 6 Lakhs 

= Rs. 10 

And

Price to Book Value would be: 

Price/Book Value = Current Market Price /Book Value i.e. CMP/BV

  = 20/10 = 2

Consequently, this company's P/ BV ratio would be 2 times.

Limitations of Price to Book Value Ratio

The Price-to-Book Value (P/B) ratio has several limitations:

1. Doesn't Account for Intangible Assets: The P/B ratio only considers tangible assets and doesn't account for intangible assets like brand value, intellectual property, or goodwill, which can be significant for certain companies.

2. Not Reflective of Future Earnings: The ratio is based on historical values and doesn't reflect a company's future earning potential or growth prospects.

3. Varies by Industry: Different industries have different norms for P/B ratios, so comparing ratios across industries may not be meaningful.

4. Doesn't Consider Liabilities: It focuses on assets and doesn't consider liabilities, which are also crucial in determining a company's financial health.

5. Stock Price Factors: Stock prices can be influenced by factors beyond the book value, such as market sentiment, industry trends, and macroeconomic factors, making the ratio less reliable as a standalone measure.

Frequently Asked Questions

What is Price-to-Book Value Ratio (P/BV)?

• Price to Book Value Ratio is a broadly used ratio to discover price relative to the value.

• The P/BV measures the company's current market price (CMP) vis a vis its book value.

• Book value is calculated by dividing net worth by the number of outstanding shares.

• The book value is the accounting value per share in the company's book. It corresponds to the net worth (capital plus reserves) per share.

• A significant limitation of this number is that most assets on the company's books are revealed at their historical cost less depreciation and not their realizable/liquidation value.

• On the other hand, it is a company building reserves from sustained profitability; the book value is a vital indicator of value. Because the book value considers a company's net worth, it is an essential number in fundamental analysis.

Why Market Pricing the Share at A Price Less Than BV?

There could be various reasons why a stock is priced below its book value, such as previous poor investments by the company that need to be written off. Hence, not all stocks with a price-to-book value (P/BV) ratio below 1 are necessarily good buys. Investors should not rely solely on the P/BV ratio for investment decisions and should recognize that stocks trading below their book values are not always bargains or undervalued.

What Is the Book Value of a Stock?

The book value of a stock is the value of the company's assets that shareholders would theoretically receive if the company were liquidated, and all debts were paid off. It's calculated by subtracting the company's total liabilities from its total assets and then dividing by the number of outstanding shares.

What is CMP Meaning in Share Market?

In the stock market, CMP stands for "Current Market Price." It refers to the most recent price at which a particular stock was traded. CMP is used by investors and traders to track the current value of a stock and make decisions about buying or selling based on its current market price.

P/BV meaning in share market ?

PBV is a valuable measure to value stocks where the earnings are negative, and the more widely used PE ratio is not applicable. It facilitates evaluation across companies in an industry where book-keeping standards are dependable. It is an excellent compute for value stocks of companies, such as in the banking industry. On the other hand, this valuation method may not be relevant for sectors like the service industry, where assets are limited.