Posted by Price to Book Value –
Price To Book Value is very important metrics which shows relationship between market price and book value. PB is very popular amongst investors and analysts because it helps to identify potential investments. PB can be calculated by dividing market price per share by the book value per share.
Price To Book Value = Market Price Per Share / Book Value Per Share
PB shows how much price is multiple of book value. We have studied book value in our previous posts.
To calculate PB, we need book value per share. We know how to calculate book value, it is nothing but total assets minus total liabilities and book value per share means divide book value by total outstanding shares so we will get book value per share.
Lets take an example, Consider company A which has following data,
Market Price = Rs 100/share
Total Outstanding Shares = 1cr
Total Assets = Rs 100cr
Total Liabilities = Rs 60cr
Now we can calculate PB, First we need Book Value,
Book Value = Total Assets – Total Liabilities
Book Value = Rs 100cr – Rs 60cr
Book Value = Rs 40cr
Now we need Book Value per share,
Book Value Per Share = Book Value / Total Outstanding Shares
Book Value Per Share = Rs 40cr / 1cr
Book Value Per Share = Rs 40
Now, we have got Book Value per share, So now calculate Price To Book Value
Price To Book Value = Market Price Per Share / Book Value Per Share
Price To Book Value = Rs 100 / Rs 40
Price To Book Value = 2.5
So this is how Price to Book Value calculated.
If PB is more than 1, it means the stock is overvalued and if PB is less than 1 it means the stock is undervalued. But some investors have different views on this ratio, They believe if PB is more than 1, it means investor thinks the company has growth potential and if PB is less than 1, it means investor thinks company is facing issues or have some problems in short they don’t see much growth in that company.
Price to Book Value varies from industry to industry, Manufacturing, Infrastructure industries have low PB ratio while IT and consulting industries have high PB ratio. If you have to use PB ratio for research then compare PB ratio within the same industry.
PB ratio is commonly used in Banking stocks.
