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Price Book Ratio ( PB ratio )
Written by Kenny Foo   
Monday, 16 March 2009 10:51

Investment Formula Description

Price Book ratio ( PB ratio ) or price to book ratio is an investment formula to measure a ratio of a stock's market value to its book value.

Similar to price earnings ratio ( P/E ratio ), it is used to measure the price the investors is paying to certain variables of the stock. For price earnings ratio ( P/E ratio ), it is the price paying to certain earnings, while for price book ratio  ( PB ratio ), it is the price paying to the book value of the stock. Stock prices are determined by market. Thus, price book ratio ( P/B ratio ) sometimes is also known as market to book ratio or price to equity ratio. For price book ratio ( P/B ratio ), it is the lower the better. A lower price book ratio ( PB ratio ) or price to book ratio could mean that the stock is undervalued. Hence, value investors like to use price book ratio ( PB ratio ) to search for undervalued stocks. However, investors cannot use price book ratio ( PB ratio ) in isolate as low price book ratio ( PB ratio ) might mean fundamentally wrong in company. Moreover, price book ratio ( PB ratio ) also gives investors what they are paying for what would be left if the company went bankrupt immediately. For examples, if the price book ratio ( PB ratio ) is less than 1, it means that the book value of the company is greater than the stock price. When the company went bankrupt, the investors will get more than what they are paying to purchase the stocks.

 

Investment Formula

Price Book ratio ( PB ratio ) or price to book ratio  = Stock Price  / Book value per share 

Investment Formula Example

If Corporation RSY has $ 5  book value per share for last financial period and its current closing price is $4.5, its price book ratio ( PB ratio ) calculation is as following.
Price Book ratio ( P/B ratio ) or price to book ratio = Stock price / Book value per share  = 4.5 / 5 = 0.9

Corporation RSY has 0.9 for its price book ratio ( PB ratio ). In this case, when corporation RSY went bankrupt immediately, the investors will be able to get back $5 even they only purchase the stock with $4.5 on its closing price. Obviously, corporation RSY is considered undervalued.

 



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Last Updated ( Thursday, 19 March 2009 09:52 )
 
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