• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Personal Profitability Logo 2016

Personal Profitability

Personal finance for hustlers and entrepreneurs

  • Start Here
  • About
    • Personal Profitability Bootcamp
    • Create Your Website in 5 Minutes!
    • Profitability Resources
    • Media & Interviews
  • eBooks
    • The Personal Profitability Complete Beginner’s Guide to Personal Finance
    • Personal Finance Arsenal eBook
  • Blog
    • Income Reports
  • Podcast
  • YouTube
  • Contact / Work With Me
    • Profitability Coaching

P/E ratio

What Price/Book Ratio Means in Investing

June 28, 2011 by Eric Rosenberg

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.

Image by epicharmus.

Filed Under: Investing Tagged With: Book value, Business, Investing, P/B ratio, P/E ratio, Stock, Value investing, Warren Buffett

Primary Sidebar

Connect with Me!

  • Facebook
  • Instagram
  • Pinterest
  • Twitter
  • YouTube

Join the Email List

This field is for validation purposes and should be left unchanged.

Subscribe to get on the path to Personal Profitability

  • Bootcamp
  • Podcast
  • YouTube

I started a little side hustle blog in 2008, and left my full-time day job as a Senior Financial Analyst to turn my side hustle into a full-time gig. Learn how I did it so you can build your side hustle. It all starts with the first dollar.

Copyright © 2022 · Narrow Bridge Media, Inc. · All Rights Reserved

Go to mobile version