P/B Ratio – Price-to-Book Ratio
What Is the P/B Ratio?
The price-to-book ratio (P/B) is a substance-oriented ratio for assessing a company's stock market valuation. The traditional theory of value investing states that a stock is cheaper the lower its P/B ratio is, and that its fair value roughly corresponds to book value. A stock is considered a good investment at a P/B ratio of 1.5 or lower.
Calculation
Book value is defined as:
| Stock price | €50.00 |
| Book value per share | €55.00 |
| P/B | 50 / 55 = 0.91 |
| P/B < 1.0 | Stock below book value – very cheap |
| P/B 1.0 – 1.5 | Cheaply valued |
| P/B 1.5 – 3.0 | Fair valuation |
| P/B > 3.0 | Tends to be expensive |
Finanzoo F-Score Calculation
Since franchise agreements, brand names, patents and trademarks have also been included in the calculation of equity in recent years, most companies today have a higher P/B ratio. For this reason, Finanzoo multiplies the P/B ratio by the P/E ratio to calculate the score and compares this to a factor derived from empirical studies (Graham factor). Values below this factor receive higher scores.
In the Finanzoo F-Score, the price-to-book ratio is weighted at 12%.
Discussion
A company's book value ultimately represents equity. This includes, for example, warehouses, machinery, inventory and real estate. If the P/B ratio falls below 1.0, it means that the stock is worth less on the stock market than the sum of all assets – a classic margin of safety in value investing.
It should be noted critically, however, that book value can be distorted by valuing real estate at historical acquisition cost. Additionally, the P/B ratio is of limited use for young, growth-oriented companies, as they often have little accumulated book equity.
Summary
The P/B ratio is a relatively easy-to-calculate ratio for fundamental company valuation and is well suited for pre-selection (stock picking) of worthwhile investments. However, for a comprehensive fundamental analysis, it should be combined with other ratios such as P/E ratio, ROA and F-Score.