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Price - Book Value Ratio (P/BV or P/B Ratio)

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The price to book value ratio, or PBV ratio, compares the market and book value of the company. Imagine a company is about to be liquidated. It sells of all its assets, and pays off all its debts. Whatever is left over is the book value of the company. The PBV ratio is the market price per share divided by the book value per share. For example, a stock with a PBV ratio of 2 means that we pay Rs 2 for every Rs. 1 of book value. The higher the PBV, the more expensive the stock.

Most companies have a PBV greater than one. This means that its market value is higher than its book value. Why is this the case? There are two reasons:

First, investors will pay a premium above the book value if the company is expected to generate enough earnings in the future. These earnings justify a market value above the book value.

Second, the book value of the firm may not be up to date. For example, the value of an asset on a company's balance sheet often reflects what the firm paid for the asset. This is not necessarily what the asset is currently worth. The best example of this is property, which typically increases in value over time. In this case, the true book value is higher than what the financial statements imply.

The PBV is most relevant for firms that are close to liquidation or bankruptcy. If a firm is liquidated, shareholders receive the book value. Once caveat here is that the bankruptcy process is costly. There is no guarantee that shareholders receive the entire book value for a liquidated firm.

The PBV ratio is more useful for firms that hold assets of tangible value. Manufacturing firms are a good example. They hold property, machinery, plants, etc. For firms with few tangible assets, the book value is less relevant. For example, companies that consists solely of employees, computers, and office space, don't have a meaningful book value.

The Price - Book Value Ratio Formula

The PBV ratio is the market price per share divided by the book value per share. The market price per share is simply the stock price. The book value per share is a firm's assets minus its liabilities, divided by the total number of shares.

PBV ratio = market price per share / book value per share

Calculating the Price - Book Value Ratio, An Example

Suppose Bajaj Auto's current stock price is Rs 3,135. And their most recent book value per share is Rs 598. Using our formula gives us a PBV ratio of 5.32.

Bajaj Auto PBV = Rs 3,135 / Rs 598 = 5.32

Comparing Price - Book Value Ratio with Other Indicators

How does the PBV ratio compare to other indicators, such as price to earnings (PE) or price to cash flow (PCF)? When valuing a company, the PE ratio is most commonly used measure. This is because when we buy shares in a company, we are buying into their future earnings. Earnings is what is left for shareholders once all expenses are paid. The PCF ratio measures how much we are paying for a company's cash flow. This could be quite different from earnings if the company has significant capital expenditures, or non cash items on their income statement. Both the PE and PCF ratio are computed based on a firm's operations over a period of time. For example, earnings or cash flows during the last quarter. The PBV ratio is different. It is computed based on firm's assets and liabilities, which come from the balance sheet.

The PBV ratio is most relevant for firms that are close to liquidation. This is not the case for the majority of firms. That said, it is still a useful measure, particularly when comparing firms in similar industries. Occasionally, you will find firms with a PBV ratio below one. This could be a potential buying opportunity, but it must be investigated carefully.

Price to Book Value (P/BV or P/B ) Financial Ratio Analysis

The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its book value. Find out how this ratio is calculated and how you can use it to evaluate a stock.

FAQs on Price - Book Value Ratio

1. What is the formula used to calculate the Price to Book Value (PBV) ratio?

The PBV ratio is calculated by dividing the market price of a company's share by the book value per share.

The market price is simply the stock price.

The book value per share is a firm's assets minus its liabilities, divided by the total number of shares. It is the value of the company's assets that shareholders would theoretically get if the company were to wind up.

PBV ratio = market price per share / book value per share

2. Why is the Price to Book Value (PBV) important?

The PBV ratio is important as it helps in understanding whether the stock seems reasonable as compared to its balance sheet.

It is most relevant for firms that are close to liquidation or bankruptcy. If a firm is liquidated, shareholders receive the book value. Once caveat here is that the bankruptcy process is costly. There is no guarantee that shareholders receive the entire book value for a liquidated firm.

The ratio is also useful for firms that hold assets of tangible value. Manufacturing firms are a good example. They hold property, machinery, plants, etc.

For firms with few tangible assets, the book value is less relevant. For example, companies that consists solely of employees, computers, and office space, don't have a meaningful book value.

3. How to use Price to Book Value (PBV) to identify multibagger stocks?

While there's no guaranteed method to spot a multibagger stock, you can use the PBV ratio to select stocks trading at low valuations to ensure you have a margin of safety while investing.

A low P/BV indicates that the stock is trading at a discount to the company's book value and vice versa.

Multibagger stocks also have some qualitative rules.

If you're looking for multibagger stocks, you need to look out for ingredients such as high growth rates, expanding PE ratios, capital efficiency, debt levels and the company's competitive advantage.

Equitymaster has a screener which can help you find high growth companies. You can start your search there.

And if you want to get a sense of how big returns could be, see our list of multibagger stocks here...

4. What is a good Price to Book Value (PBV) ratio?

As per the tenets of value investing, any value under 1 is considered a good value. However, investors often consider stocks with a PBV value under 3.

Equitymaster has a screener which can help you find Low Price to Book Stocks and High Price to Book Stocks. You can start your search there.

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