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 reserve 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.

 

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

 

Equity Capital: Rs. 10 Lakhs

Reserves & Surplus: Rs. 50 Lakhs

Number of shares outstanding: 6 lakhs

Current Market Price: Rs. 20

Subsequently, BV would be:

Net-worth/ Number of shares outstanding = (Rs. 10 Lakhs + Rs. 50 Lakhs)/ 6 Lakhs = Rs. 10

And, P/ BV would be:

P/BV = CMP/BV = 20/10 = 2x

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

P/BV less than 1 indicates the company is trading below its book value, and for this reason, the stock is deemed to be undervalued.

On the other hand, it is applicable to ask, ''why is the market pricing the share at a price less than BV?'' There may be several reasons for a stock being available for less than its book value, including the poor investments made by the firm in the past which need to be written down then.

Therefore, all the companies with P/BV less than 1 may not be value buys. Investors should not depend on PBV for their investment decisions and should understand that not all stocks that trade at a discount on their book values are bargains (undervalued).

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.

 

Differential Voting Rights (DVR)

A DVR is similar to a company's share, except it carries less than one voting right per share, unlike a common share. The issuers who wish to raise capital without diluting voting rights by using the DVR instrument. Investors who wish to invest only for dividends and capital appreciation and are not bothered about voting rights find these attractive shares.

The number of voting rights for a DVR differs from company to company. DVRs typically trade as a separate category of the instrument and are available at a discount to the common shares of a company.

The Companies Act, 2013 defines a company's eligibility to issue such shares. This includes a dividend of at least 10% over the former 3 years, and such shares shall not exceed 25% of the company's total post-issue paid-up capital.