Answers the Question
Are these shares of stock fairly valued?
Calculator for Price to Book Value
What Is the Price to Book Value?
The price to book value ratio provides insight into a company's share price. It is sometimes referred to as the market-to-book ratio or the price-to-equity ratio.
Why Is it Important?
- The price to book value ratio provides an analysis of the worst-case scenario. What happens if the company I invest in goes bankrupt. The lower the ratio, the more backing an investment will have with real assets. A price to book value of 2/1, for instance, will provide roughly $1 in bankruptcy for every $2 that were invested. This recoupment will be achieved through the sale of the firm's assets.
Formula(s) to Calculate Price to Book Value
- PRICE TO BOOK VALUE = PRICER PER SHARE / BOOK VALUE PER SHARE
- Using the same standards across different industries. Many high-tech industries, for instance, will tend to have a relatively low price to book value ratio. This is because such companies tend to derive their worth from knowledge and positioning, rather than assets.
- Not calculating the book value correctly. In an age of off-book assets, a firm's true book value may be quite different than the numbers presented to potential investors.
- Not considering the liquidity of the underlying assets. The assets of a precious metals dealer, for instance, can likely be liquidated far more quickly than those of an art dealer.