The price-to-book value is a ratio that tells you the relationship between the price for which  a stock is currently trading and the actual book value of a company. By comparing these two values, you will be able to determine if the stock is currently trading at a bargain or if it is overpriced.

Calculating

Calculating price-to-book value is relatively simple. You will first need to determine what the book value of the company is per share. Start by looking at the company's total assets. Then subtract the liabilities from the assets. The difference you get is the company's book value. You will then divide that number by the amount of outstanding shares of stock in the marketplace. This gives you the book value per share. You then take the current price of the stock in the market and divide it by the book value per share.

For example, let's say that a company has $200 million of assets and $100 million of liabilities. This means they have a $100 million book value. Let's also say that they have 20 million outstanding shares of stock in the marketplace. To determine the book value per share, you would take $100 million and divide it by 20 million shares. This will give you a book value of $5 per share. 

You also notice that the stock is currently trading for $10 per share in the market. You would then take $10 and divide it by $5 to come up with a ratio of 2. 

Benefits

This method is a favorite tool of value investors. With the price-to-sales value, you will be able to determine if a stock is underpriced in the market. When you do your calculation, if you come up with a ratio of less than 1, this means the stock is currently trading for below what it is valued at. In that case, you might want to make a purchase.

Drawbacks

Even though this method is relatively effective, it is not foolproof. This method works only when you are dealing with companies that show all of their value on the books. With technology companies, much of their value depends on patents and human capital. These are things that cannot be calculated in with the assets of a company. Therefore, in using this method, you could make an incorrect judgment about a company's value.

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