Last night, I watched a fascinating CNBC show about “as seen on TV” product that are sold primarily through infomercials. I have never bought anything from an infomercial, but apparently a lot of people have. Those TV products have made a lot of people a lot of money.
If you are baffled by the ratios in the stock market, you are not alone. You can easily find a whirlwind of figures and ratios. Some of them, such as P/E and market cap are easily explained and understood. However, you might be able to find more value from less known ratios such as Price/Book.
How It Is Calculated
The first step is to calculate book value per share. Book value is the total shareholder’s equity (assets minus liabilities) less preferred stock. This is the accounting value of the company. In theory, the book value is the most conservative valuation method for a company. It is the net value of the company’s assets if it were to stop operating today.
Book Value = (Assets – Liabilities) – Preferred Stock
To calculate book value per share, simply divide book value by the number of common shares outstanding.
Book Value Per Share = Book Value / Shares Outstanding
Next divide the share price by the book value per share to find the Price/Book Ratio.
Price/Book Ratio = Share Price / Book Value Per Share
What It Really Means
This ratio tells you if the stock price of a company is significantly higher than the value of tangible assets of a company. If the stock price is higher, the company must have a solid business model to contribute value to the share price. If a company has a bad business model, the stock price should be closer to the book value per share.
How I Use It
Warren Buffet is known for “value investing.” Part of his analysis is to look at the underlying value of a company’s assets. If the stock price is lower than the book value per share, investors are practically guaranteed a gain even in the worst case scenario.
When I am looking for investment opportunities, I can use a stock screener to find BV/Share investment opportunities where the ratio is very low. If the BV/Share is less than 1.0, investigate why the company’s stock is performing so poorly. It is almost certainly worth more than its current value if the book value is higher than the share price.
If the book value per share is incredibly high, it does not necessarily mean a company is a bad investment. Software companies, for example, usually do not have many tangible assets. However, a low BV/share could indicate a company is a good investment.
Want to Know More?
Be sure to read my in-depth guide to how the stock market works to learn everything you need to know to get started with investing.
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I am a 26 year old guy. Most weekdays, I leave my apartment around 7:30am and get home around 9:00pm. On weekends, I am busy watching movies, curing hangovers, and de-stressing from the week. Lately, that does not involve a lot of time for cleaning.
The Cost of Having a Maid
I have a fairly small apartment. Cleaning the entire thing very thoroughly takes about two hours. I don’t mind grabbing a Clorox wipe and cleaning off the toilet or counter tops, but I hate scrubbing the tub. I hate mopping. I hate vacuuming. It is something I have always done out of necessity, but it is not something I would ever miss.
I had a maid come by and quoted me $40 per cleaning. At six times per year, that is $240. I am a clean person, so I don’t need my apartment cleaned more often than that.
The Value of My Time
The maid charges about $20 per hour for the cleaning. Do I value my time at more than $20 per hour? My employer does, as I am paid more than that for going to work. If I can earn more in that hour than $20, it is surely worth it.
However, I can’t say for sure that I would always use every hour productively and couldn’t find two hours if I needed to clean the apartment. That means I have to decide what my time is worth to me and whether it is a better use of my time to clean or my money to have it cleaned.
Is two hours of free time worth $40? Even more, is two hours doing something I don’t like worth $40?
I Hired the Maid
Yes. I gave in. Frugalistas can have a field day hating me for this one, but I would rather spend the $40 and have two hours of time to do something I enjoy while skipping something I do not enjoy.
Maybe growing up having a maid come diluted my perception, but I am happy to pay for this service. Some people would be willing to pay me to write freelance articles or do accounting work for them. I don’t mind accounting or writing. I keep the economy going by hiring someone to do something I don’t like at a rate I find acceptable.
Your Experience – Is it, or would it be, worth it?
Do you have a maid? Do you want a maid? Do you think I am lazy and ridiculous? Please share your thoughts and experiences in the comments.
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A long time ago in a galaxy far, far away… I mean, more like ten years ago about twenty minutes south on I-25, I took my first business and economics classes. Those classes changed my life and my outlook.
Roots in Business
I set my business roots at an early age. Investing and finance has run in my blood for generations. My Grandfather was a marketing professor and started teaching me about the stock market, personal finance, investing, and money management at a young age.
My Grandpa Joe grew up during the Great Depression and earned money the old-fashioned way. He worked hard, lived a thrifty lifestyle, and built up significant savings and investments during his life.
My Dad was in the business world my whole life as well. When I was younger, my Dad was involved in merchandise management and retail. That path led him to purchase a video store when I was about six. We had that store for nearly ten years.
I grew up exposed to the entrepreneurial world and the investing world, but I did not realize the impression it left on me until high school.
Boy Scouts and FBLA
You know those Boy Scouts that sell popcorn, Gold C books, and Entertainment books? I was the best.
I don’t mean to brag… well, yes I do… but I was the top seller in my troop every year that I put in my best effort. I would go pick up five cases of books and sell every single one. Those book sales paid for my summer camp, ski weekends, and other Scout activities.
Again, I never realized the significance of this until later in life.
My junior year at Cherry Creek High School, I took my first business class. Students were required to take either fine arts or business credits to graduate, and I spent my three semesters in the business side of the world.
My first business class, appropriately named “Introduction to Business Management,” gave me a basic view of business fundamentals. I learned about income statements and balance sheets and real-life business situations that impacted the development of the business environment in the United States. From there, I went on to join the school’s Future Business Leaders of America club, compete in the district and state competitions, and became Treasurer of the club.
Selling My Soul
It was around that time that I took Mr. Kraft’s class. That teacher, with a different tie every single day of the school year, left more of an impression on me than my fashion sense. We learned about competitive advantage through examples involving pizza, robots, and widgets. We learned about labor markets and management incentives. We discussed the Milton Friedman version of business. Friedman, of course, is famous for his view that the purpose of business is solely to create value for its shareholders.
I went on to receive an undergraduate finance degree led by those principles. The purpose of business is to make money. The purpose of charity and non-profits is to make the world a better place.
In my MBA program at the University of Denver, known nationwide for its emphasis in sustainability and responsible business management, we were given a different twist on the business world. In the feel-good world of the “Triple Bottom Line,” where we focus on profit, people, and the environment, more comes into focus than just making money.
The Middle Ground
At the end of the day, I am still a follower of Friedman’s philosophy. If a business is not making money, it goes out of business. If it makes more money than another business, the other one goes out of business. Survival of the fittest is a concept that goes far past nature.
That is why I have no problem owing stock in oil, tobacco, and other controversial industries. Someone is going to be making money; it might as well be me.
However, business does not have to be bad for the world. Corporations have solved many of the world’s biggest problems and make a major contribution to society. Walmart installed skylights and tested rooftop wind turbans on a handful of stores. The skylights have been adopted nationwide. They save electricity and make a major impact on fossil fuel use and greenhouse gasses, but also save the company millions of dollars per year in energy bills. That is a win-win. I am a proud Walmart shareholder.
There are dozens of examples like this. At the end of the day, a company’s first responsibility is to its shareholders. At the same time, however, that company can do amazing things for the planet and society. From small acts like adding recycle bins to major campaigns to cut carbon emissions and production waste, companies can make more money by “doing the right thing.”
But the next time you see a protest against a company’s policies, remember its roots. Even Walmart started as a small drug store across the street from city hall in Bentonville, Arkansas. Berkshire Hathaway was an investment fund started by an ambitious young man named Warren. Dell came from a dorm room. Amazon used to be headquartered in a garage.
Every business started somewhere. They came from an idea in the pursuit of profit.