P/B Ratios

P/B Ratios

The Price-Book Ratio is another way to evaluate the value of a stock. It's calculated by dividing the current price of a company's stock times its shares outstanding (market capitalization) by its last quarter's book value. Book value is assets less liabilities which is equivalent to book value of equity. A P/B ratio represents the market value for every dollar of tangible assets. So a P/B ratio of 5 would mean that for every $1 of tangible assets there is $5 of market value. Thus a low P/B ratio means that the stock is "backed up" by tangible (saleable) assets, whereas a high P/B ratio probably means that investors have high expectations for the company. P/B ratios, just like P/E ratios, should be compared within industries. Also remember that book value is an accounting measure, and therefore it can be somewhat deceiving sometimes.

Here are a few examples of P/B ratios (as of 2/14/06):

  • Google: 11.6
  • Apple: 7.3
  • Yahoo: 6.1
  • Microsoft: 5.8
  • S&P 500: 4.1
  • Walmart: 3.8
  • General Electric: 3.1
  • AT&T: 2.3
  • Sun Microsystems: 2.2
  • Walt Disney: 1.9
These were taken from morningstar.com.

As you can see, newer companies, for which investors have high expectations of future earnings, generally have higher P/B ratios that more well established companies.

P/B ratios are nice for companies that have negative earnings (since P/E ratios don't really work in that case). If a company's P/B ratio is high compared to others in its industry, then the stock might be overvalued. If its P/B ratio is low compared to others in its industry, then it might be undervalued or the company may be performing poorly. Acquisitions can also reduce the book value of a company (ie: they are adding assets to their books while stock prices remain somewhat steady).

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