Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,130.03 +5.58 +0.18%
Hang Seng 26,521.85 0.00 0.00%
Dow Jones 26,787.36 -29.23 -0.11%
Shanghai Composite 3,007.88 +34.23 +1.15%
How To Use The P/B Ratio
Education | 24 June 2014
By:

I’m pretty sure you’ve heard people tossing this phrase around whenever they’re talking about stocks.

“It’s discounted because its P/B ratio is below one!”.

So what is this P/B ratio anyway, and how do you use it? Price to Book ratio, or commonly known as P/B, is a measure between the current stock’s price relative to its book value.

It is used as one of the assessment metrics to determine whether or not a particular share is trading at a premium or discount, when compared to its current book value.

How To Calculate It
How do you calculate this yourself? The formula is as follows:

Current Share Price / Book Value Per Share (BVS)

Book Value per share is also known as the net asset value per share of the company. This is how you calculate it:

(Total Assets – Total Liabilities) / Number Of Shares Outstanding

Example Walkthrough
Let’s walk this through an example. I am using a company listed on the Singapore Stock exchange, AIMS AMP Capital Industrial REIT Management (AIMS).

Firing this up on the search bar of Shares Investment’s website, you’ll see this summary of numbers in the corporate profile of the company.

Source: Shares Investment’s Corporate Profile Pages

Notice that the P/B ratio written here is 0.98.

Now, let’s work it out on our own to see if you’re getting it right.

Source: Shares Investment’s Corporate Profile Pages


Using the latest fields selected, as shown by the figures boxed up in blue, we plug them into the formula above to get the net asset value (Book value).

The Book Value calculation would have gotten you a figure of $911.888 million.

Divide this by the number of shares outstanding (seen from figure 1), of 621.156 million, you would’ve gotten the BVS of $1.468.

Then, using the current price of $1.44, we divide it by the BVS you just calculated, reflecting 0.98, which is the same as that shown in the summary of numbers you first saw in AIMS’ corporate profile (figure 1).

Above, Below, Close To Book Value Per Share
As a general rule of thumb, when the share price is trading lower than the book value per share, it is said to be “discounted”. When the share price is trading above the book value, it is said to be trading at a “premium”.

Finally, when the share price is trading close to its book value per share, it is deemed to be fairly priced.

Do not use this loosely. Instead, look further into the company and find out why it is trading at such a price (if it’s significantly lower/higher than its book value per share)

A lot of China shares are trading below their book value with the P/B ratio reflecting values as low as 0.06 and with a reason so, probably due to a myriad of reasons, where accounting anomalies could probably be one of them.

P/B Ratio Filter on Shares Investment

The same thing applies to that of stocks with high P/B ratios. It’s just rare for super good companies with strong moats to not be trading above their P/B ratios.

Filter, Dig Deeper, Do Your Homework
It is hard to keep track of all the stocks listed on the SGX. I totally get it. Therefore the P/B ratio acts as a good starting point to filter out potential plays before your secondary study to unearth more information on the companies.

To make your analysis sounder, you should not only rely on just the P/B ratio alone. Instead, you should combine it with other valuation ratios like P/E ratio, Return on Equity, or even profit growth.

It just makes more sense zooming deeper into a company with a low P/E ratio, consistent profit growth, and relatively low P/B ratio, compared to a company with just a low P/B ratio and nothing else.

Try it out and put this ratio into your analytical toolbox. Have fun practising!


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.