The basics of price to book value (P/BV) - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The basics of price to book value (P/BV)

Jul 9, 2012

The price to book value (P/BV) ratio is a widely used valuation parameter used for valuing stocks. But what does P/BV mean and how can investors use this parameter to value their investments? In this article, we will try and simplify this concept.

How is price to book value calculated?

P/BV is arrived at by dividing the market price of a share with the respective company's book value per share. Book value (BV) is equal to the shareholder's equity (share capital plus reserves and surplus). BV can also be derived by subtracting current and non-current liabilities from total assets. For the banking and finance companies, book value is calculated as 'share capital plus reserves minus miscellaneous assets not written off. This formula then takes care of the bank's NPAs (non performing assets) and gives a correct picture.

Let us take up an example and calculate the latest book value Infosys.

FY12 Balance sheet of Infosys
Liabilities Rs bn Assets Rs bn
Equity capital 3 Cash 206
Reserves & surplus 310 Other current assets 97
Current liabilities 69 Fixed assets 61
Non-current liabilities 4 Non-current assets 17
    Deferred tax assets 5
  386   386

If one were to take a look at Infosys' consolidated balance sheet for FY12, as mentioned above, book value will be arrived at by adding Rs 3 bn (equity capital) and Rs 310 bn (reserves and surplus), which equals to Rs 313 bn. Conversely, when we deduct current and non-current liabilities from total assets, we shall arrive at a similar figure. Now, by dividing this book value (Rs 313 bn) by the issued equity shares of the company (approx 574 m), we would arrive at the book value per share figure, which is Rs 545. This will be our denominator for calculating the P/BV for the Infosys stock, which currently stands at about 4.5x (at market price of Rs 2,438).

What does P/BV indicates?

Usually, P/BV figures for companies in the services industries like software and FMCG are high as compared to those of companies in the sectors like auto, engineering, steel and banking. This is due to sectors such as software and FMCG have low amount of tangible assets (fixed assets etc.) on their books and therefore, the P/BV may not be a correct indicator of valuation. On the other hand, capital intensive businesses such as auto and engineering require large balance sheets, i.e., they have a large amount of fixed assets and investments. P/BV is a good indicator of measuring value of stocks from such capital intensive sectors.

If a company is trading at a P/BV of less than 1, this indicates either or both of the two -

  • Investors believe that the company's assets are overvalued, or

  • The company is earning a poor return on its assets.
A high P/BV indicates vice versa, i.e., markets believe the company's assets to be undervalued or that the company is earning and is expected to earn in the future a high return on its assets. Book value also has a relationship with the Return on Equity of a company. In fact, book value can also be termed as equity (equity capital plus reserves and surplus). As such, for a company that earns a high return on equity, investors would be ready to give the stock a high P/BV multiple.

What does P/BV fail to indicate?

P/BV indicates the inherent value of a company and is a measure of the price that investors are ready to pay for a 'nil' growth of the company. As such, since companies in the services sectors like software and FMCG have a high growth component attached to them, Price to Earnings ratio (P/E Ratio) would be a better method of gauging valuations.

Investors would do well to note that P/BV should not be used for valuing companies with high amount of debt. This is because high debt marginalizes the value of a company's assets and, as such, P/BV can be misleading.

We hope this article was able to throw some light on the concept of P/BV and its relevance from an investor's viewpoint. The ratio has its shortcomings that investors need to recognise. However, it offers an easy-to-use tool for identifying clearly under or overvalued companies.

This article was originally written on September 13, 2004 and has been updated.

Devanshu Sampat

Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.

Equitymaster requests your view! Post a comment on "The basics of price to book value (P/BV)". Click here!

1 Responses to "The basics of price to book value (P/BV)"

Sunil Yadav

May 23, 2016

The information was very useful. Is it possible for you to send valuation of any banking company by p/bv method ?

Like (1)
Equitymaster requests your view! Post a comment on "The basics of price to book value (P/BV)". Click here!

More Views on News

Why Ruchi Soya Share Price is Rising (Views On News)

May 23, 2022

Ruchi Soya is on an upward trend post acquisition announcement. Find out other reasons why it could be rallying...

The 10 Best Penny Stocks in India to Add to Your Watchlist (Views On News)

May 22, 2022

These penny stocks have a high potential to deliver good returns in the long term. Watch out for them.

4 Stocks Hitting 52-Week High in a Falling Market. Should You Exit? (Views On News)

May 21, 2022

These stocks defied the market trend in 2022 and kept racing ahead. Find out why.

5 Things to Know About Aether Industries IPO (Views On News)

May 24, 2022

One needs to be very choosy when it comes to chemical stocks. If they disappoint on growth, there can be significant de-rating.

The Only Stocks You Can Count on in Volatile Markets (Profit Hunter)

May 24, 2022

Be sure of sustainability of profits and need to differentiate between structurally strong businesses those benefitting from temporary price rises.

More Views on News

Most Popular

How To Find Undervalued Stocks

A short guide on identifying and investing in the most undervalued stocks in India.

2022's Best Performing Penny Stocks So Far... (Views On News)

Mar 2, 2022

We are just two months into 2022 and several penny stocks that we track have already surged 5x.

5 Debt Free Penny Stocks with Good Profitability to Watch Out for in 2022 (Views On News)

Mar 16, 2022

Debt free penny stocks are vital when it's a question of portfolio diversification in a volatile market. They can potentially offer good profitability in the long run.

Penny Stocks to Buy and Hold Beyond 2022 (Views On News)

Apr 6, 2022

A step-by-step method to pick the best penny stocks for the long term.

6 Penny Stocks that Could Be Hidden Bluechips. Take a Look... (Views On News)

Apr 13, 2022

These penny stocks can become future multibaggers. Watch out for them.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


May 24, 2022 11:38 AM