What is Price-to-book ratio? How Useful is this ratio?

• Measures the value that the stock market places on a company relative to its book value.
• Also known as price-equity ratio

• Frequently used by investors to find undervalued companies

Simple illustration:

Interpretation:

• Generally,a high P/B indicate that a company is overvalued and a low P/B ratio an undervalued company.

Salient points to note:

• This business ratio is relatively simplistic
• High P/B might not mean overvalue as the public might view the company’s future are good and earning potential is high

• Also,in bull market,normally high P/B but during bear markets P/B be similar re:nearer to 1
• Also be aware that some consumer and service orientated companies have negative P/B ratio because they have relatively more liabilities than assets
• This ratio cannot be used singly and should analyzed together with other financial measurements like return on equity,etc and also cash flow and volatility of earnings must be considered too.