P/B Ratio : Price-To-Book Ratio meaning

It can be both exciting and difficult to choose the right company to invest in, with so many listed companies on the financial markets. An investor doesn't have to trust his or her gut instincts to invest. They can also go about it systematically. Investors can calculate specific ratios, such as the'return of net worth', the 'earnings/share' or the price-to–book ratio, which can all help to determine the stock's value.

We will be discussing the price-to book ratio, also known by the P/B or market-to–book ratio.

What's the PB ratio in Stock exchange?

The PB ratio allows investors to compare the market value of shares/market capitalisations to their book value.

Understanding the meaning of the price-to-book ratio requires understanding two closely related terms, market value and bookvalue.

Market value is the company's total market capitalisation. It is calculated by multiplying the number of shares outstanding by the current share price.

The book value is the amount that shareholders would get if the company was to close down immediately, liquidate and pay all its liabilities. The book value is the remaining amount. The company's total assets and liabilities are subtracted to calculate the book value. The balance sheet of the company contains this value. The balance sheet does not include intangible assets like patents, customer lists and copyrights. Brand recognition and goodwill are also excluded.

Calculating PB ratio:

The market price per share and the book value per share are the two factors that determine the PB ratio.

Let's look at an example of how the ratio PB is calculated. Company ABC has listed Rs. Company ABC has listed Rs. 7,50,000 are its liabilities in balance sheet. The company's book value can be calculated at 1000000-750000= 250000. The book value per share of a company with 10,000 shares outstanding is Rs. 25. If the stock's market price is Rs. The PB ratio is 1.2 if the stock's market price is Rs.

The PB ratio:

Value investors need to know the PB ratio. Investors who purchase stock that is undervalued with the expectation that the stock's market value will rise in the future and they can then sell their shares for a profit.

A stock with a PB ratio below 1.0 is typically considered undervalued. Value investors and financial analysts consider any value below 3.0 a good ratio. From Industry to industry the Standard for "good PB value" varies. A PB ratio below 1.0 could indicate that IT stocks are undervalued. It could, however, be negative for the oil-and-gas industry.

Low PB ratios could indicate that the company is having financial problems. To determine if the stock is undervalued, or indicative of problems in the company's future work, the investor should look at other metrics and analyze past work.

Limitations on using the PB Ratio:

The company's declared assets value in its balance sheets is one of the key factors that affect the PB ratio. This is a good metric for companies with a large number of fixed tangible assets. This is true for manufacturing companies that own machines, factories, equipment or banks and finance institutions that have financial assets.

Companies with primarily intangible assets are not eligible for the PB ratio. Consider companies whose core assets are their idea innovation, patents, and brand awareness. These companies won't have their largest assets, intangible assets, accounted for on their balance sheets. This creates a false perception of the company's value and, as a consequence, its PB ratio.

Another limitation is that the book price only considers the original purchase price for the asset (equipment) and not current market prices. This could affect the accuracy of the value.

Other limitations apply: If the company has made recent write-offs or acquisitions or shares buybacks, the book value could be affected.

The PB ratio will not provide a comprehensive picture of whether investing in the company is profitable. To get a better understanding of the potential earnings, calculate other metrics such as return on equity.