Price to Book Ratio Explained (P/B) | Finance In 5 Minutes!
Summary
TLDRThe video script introduces the Price to Book (P/B) Ratio, a financial metric that compares a company's stock price to its net asset value. It explains the concept of book value, which represents the tangible assets minus liabilities, and how it's used to calculate the P/B Ratio. The script highlights that a low P/B Ratio indicates good value, while a high ratio suggests the stock is expensive. It also discusses scenarios where a P/B Ratio less than one or negative might signal undervaluation or insolvency. The video concludes with a practical example and a tip on where to find pre-calculated P/B Ratios, such as on Yahoo Finance.
Takeaways
- π The Price to Book Ratio (P/B Ratio) is a financial metric used to evaluate a company's market price relative to its book value.
- πΌ P/B Ratio compares a firm's current stock price to its net worth, represented by tangible assets like cash, real estate, and machinery.
- π« It's less useful for companies with significant intangible assets, such as technology firms, where value often lies in software and trademarks.
- π’ Calculated as the price per share divided by the book value per share, where book value is found by subtracting liabilities from assets and then divided by the number of shares outstanding.
- πΉ A low P/B multiple (e.g., 2 times) suggests the stock is undervalued, while a high multiple (e.g., 10 times) indicates it might be overvalued.
- π’ The ratio reflects investors' willingness to pay a premium for a company's ability to generate more value than its assets are worth.
- β οΈ A P/B ratio less than one could indicate undervaluation or that the company's assets are outdated or overpriced.
- β A negative P/B ratio is a red flag, suggesting the company's liabilities exceed its assets, posing a high risk for investors.
- π Price to Book Ratio can be found on financial platforms like Yahoo Finance under the 'Evaluation Measures' section.
- π Investors use P/B Ratio alongside other valuation metrics to make informed investment decisions.
Q & A
What is the price to book ratio?
-The price to book ratio, also known as the PB ratio, is a valuation metric that compares a stock's current price to the net worth of the company's assets, also referred to as book value.
What is book value and why is it important in the context of the price to book ratio?
-Book value measures how much a company would be worth if it sold off all its assets and paid back all its liabilities. It includes tangible assets like cash, real estate, and machinery. It's important because the PB ratio uses the book value of a company's tangible assets to evaluate companies that build their businesses around these hard assets.
Why might the price to book ratio not be suitable for technology companies?
-The price to book ratio might not be suitable for technology companies because the value of a tech company usually lies in its intangible assets, such as software and trademarks, which don't have a physical monetary value attached to them.
How is the price to book ratio calculated?
-The price to book ratio is calculated using the formula: price per share divided by the book value per share. The book value per share is found by dividing the company's total book value by the total shares outstanding.
What does a low price to book ratio, such as two times, indicate about a stock?
-A low price to book ratio, like two times, is typically regarded as good value, indicating that the stock is currently cheap and may be undervalued by the market.
What could a high price to book ratio, such as 10 times, suggest about a stock?
-A high price to book ratio, like 10 times, usually indicates that the stock is more expensive or not good value for the current price per share, suggesting that investors are paying a premium for the stock.
Can you provide an example of calculating the price to book ratio using the fictional Sam's Scooter Company?
-For Sam's Scooter Company with a stock price of $50 per share, a total book value of $150 million, and 10 million shares outstanding, the book value per share is $15 ($150 million divided by 10 million shares). The price to book ratio is then calculated as 3.3 times ($50 divided by $15).
What does a price to book ratio of 3.3 times imply about a company's assets and market value?
-A price to book ratio of 3.3 times implies that the market is pricing the company's stock at 3.3 times the net value of its assets, suggesting that investors believe the company can use those assets to generate more value than the assets are worth.
What are the potential red flags that the price to book ratio can reveal about a company?
-Two potential red flags are a price to book ratio less than one, indicating the stock is trading at less than the book value, which could suggest the company is undervalued or its assets are outdated, and a negative price to book ratio, indicating the company is insolvent with liabilities greater than assets.
Where can investors find the price to book ratio for a company?
-Investors can find the price to book ratio for a company on financial information platforms like Yahoo Finance, where it is listed under the 'Evaluation Measures' section in the 'Statistics' tab.
Outlines
π Introduction to Price to Book Ratio
This paragraph introduces the concept of the Price to Book (P/B) Ratio, a financial metric used to evaluate a firm's market price relative to its book value. The P/B Ratio is calculated by dividing the stock's price per share by its book value per share. The paragraph explains that book value represents the net worth of a company's tangible assets, which are physical assets like cash, real estate, and machinery. It also notes that the P/B Ratio is particularly useful for companies with significant tangible assets, but less so for those with intangible assets like software and trademarks, such as technology companies. The video script emphasizes the importance of understanding the P/B Ratio for investors to assess whether a stock is overvalued or undervalued.
π Calculating and Interpreting the Price to Book Ratio
This paragraph delves into the process of calculating the Price to Book Ratio, starting with the identification of a company's book value from its balance sheet, which is assets minus liabilities. It then describes how to find the book value per share by dividing the total book value by the number of shares outstanding. The script provides an example using a fictional company, Sam's Scooter Company, to illustrate the calculation. It explains that a P/B Ratio of less than one might indicate the stock is undervalued or that the company's assets are overvalued or outdated. A negative P/B Ratio suggests the company is insolvent, with liabilities exceeding assets. The paragraph concludes by highlighting the significance of the P/B Ratio in investor decision-making and how it can signal potential red flags about a company's financial health.
π» Practical Use of Price to Book Ratio
The final paragraph of the script discusses the practical application of the Price to Book Ratio, particularly focusing on how investors can easily access this information. It mentions Yahoo Finance as a go-to source for financial data, where the P/B Ratio can be found under the 'Statistics' tab in the 'Evaluation Measures' section. Using AT&T as an example, the paragraph shows that the company has a P/B Ratio of 1.3 times, indicating it trades close to its book value. The script encourages viewers to share their stock evaluation processes in the comments and to explore more educational videos on the channel, concluding with a prompt for viewers to subscribe for further content.
Mindmap
Keywords
π‘Price to Book Ratio (P/B Ratio)
π‘Book Value
π‘Tangible Assets
π‘Intangible Assets
π‘Liquidation
π‘Multiple
π‘Market Value
π‘Red Flags
π‘Yahoo Finance
π‘Investor
Highlights
Price to book ratio (P/B ratio) is a valuation metric that compares a stock's current price to the net worth of the company's assets.
P/B ratio helps investors understand the price they are paying relative to the net value of a company's assets.
Book value measures how much a company would be worth if it sold all its assets and paid back liabilities.
Book value includes only tangible assets like cash, real estate, and machinery.
P/B ratio is most useful for companies with significant tangible assets, not intangible assets like software or trademarks.
The formula for P/B ratio is the price per share divided by the book value per share.
Book value per share is calculated by dividing the company's book value by the total shares outstanding.
A low P/B ratio, like two times, indicates that the stock is considered a good value or cheap.
A high P/B ratio, like ten times, suggests that the stock is expensive or not a good value for the current price.
An example calculation shows how to determine the P/B ratio for a fictional business, Sam's Scooter Company.
A P/B ratio of 3.3 times indicates that the market values the stock at 3.3 times the net value of the company's assets.
Investors may pay a premium for a stock if they believe the company can generate more value than its assets are worth.
A P/B ratio less than one could mean the stock is undervalued or that the company's assets are outdated or overpriced.
A negative P/B ratio indicates the company is insolvent, with liabilities exceeding assets.
Yahoo Finance is a recommended source for readily calculated P/B ratios and other financial information.
The video concludes with an invitation for viewers to share their stock evaluation processes and to subscribe for more educational content.
Transcripts
[Music]
have you heard of price to book ratio
and looking to learn more
price to book ratio or pv ratio is a
valuation metric that compares the
stock's current price to the net worth
of that company's assets
hey welcome to reinance the channel
centered around your financial education
to help make you
a better investor be sure to subscribe
to the channel as i upload new
educational stock market videos
every week price to book ratio is a
common valuation ratio that helps
investors understand how much they are
paying
in stock price relative to the net value
of the company's assets
also known as book value book value is a
measure of how much the company would be
worth today
if they sold off all their assets and
paid back all of their liabilities
it's important to know that this only
includes tangible assets
which are things that you can physically
touch like cash real estate and
machinery
since pb ratio uses the book value of a
company's tangible assets
it is most useful for evaluating
companies that build their businesses
around these hard assets
a technology company for example would
not be a good candidate for pb ratio
since the value of a tech company
usually lies in its intangible assets
these can be things like software and
trademarks that don't have a physical
monetary value attached to them so keep
this in mind when using pb ratio
let's have a look at how you can
calculate the price to book ratio
the formula is the price per share
divided by the book value per share
finding the stock price is easy but
finding book value per share takes a bit
more work
first we need book value which can be
found in the company's balance sheet
and can be calculated as assets minus
liabilities
from there book value then needs to be
divided by the total shares outstanding
in the business
to find the book value per share the
output from the calculation will give
you a multiple
something like two times a low multiple
like two times
is typically regarded as good value
meaning the stock is currently cheap
if you find that a stock has a high pb
multiple like 10 times
this is usually interpreted to mean that
the stock is more expensive or that it
is not good value for the current price
per share
to further your understanding let's go
through an example of how price to book
ratio works
let's say we want to find the pb ratio
of this fictional business
sam's scooter company who has a stock
price of fifty dollars per share
sam scooter company also has a total
book value of 150 million dollars which
we found in the balance sheet
and currently has 10 million shares
outstanding the first step is to find
the book value per share
so we want to divide the book value by
the number of shares outstanding
which would be 150 million divided by 10
million
to give us a book value per share of 15
from there we use the price to book
value formula so we divide the stock
price of 50
by the book value per share of 15 to
find that sam scooter company has a
price to book ratio
of 3.3 times what this is telling us is
that the market is currently pricing sam
scooter stock at 3.3 times the net value
of the assets in the business
so in the event that the company was
liquidated and everything was sold off
the proceeds from the sale would only
cover about one-third of the market
value of the business
we know this because the stock price is
currently valued at about three times
larger than the book value of the
business
so why might a company be worth 3.3
times their book value
well this ratio implies that
shareholders are currently happy to pay
a premium of 3.3 times for the stock
this is because investors believe that
the company can use those assets
to make more money than the assets
themselves are worth thus
boosting the total value of the business
there are also certain situations where
price to book ratio can reveal red flags
of the underlying company
the first situation is where price to
book ratio is less than one this tells
you that the stock is trading at
less than the book value of the company
meaning that the net value of the assets
are worth more
than the total value of their stock
there are two ways that you can
interpret this
the first being that investors are
misjudging the company and the stock is
deeply undervalued
in this case buying the stock for less
than book value creates a margin of
safety for the investor
because if things go wrong the company
can sell out the business
and pay shareholders back in full the
other interpretation
is that investors believe the assets of
the company are outdated
or overpriced in the balance sheet so
they don't want to pay full value for
the company
in this situation an investment may be a
bad idea because if the company gets
liquidated
the proceeds from the sale won't be
enough to pay back the shareholders
another red flag is when the company has
a price to book ratio that is negative
what's happening here is that the
company is insolvent meaning their
liabilities are greater than the assets
they own
simply put the company is hugely in debt
and doesn't have enough to pay back its
debts
since they owe more than they own you
should certainly exercise caution in
this situation
because if the company goes bankrupt
they won't have enough money to pay back
their debts and thus
shareholders won't get anything for
their stock
finally pb ratio can be a bit math
intensive
so here's where you can find it already
calculated for you
my go-to source for financial
information is yahoo finance
so here we have at t stock pulled up on
there
to find pb ratio navigate over to the
statistics tab
and you can find price to book ratio
here in the evaluation measures section
we see that atnt has a price to book
ratio of 1.3 times
meaning the company trades very close to
its book value
thanks for watching today do you usually
use pb ratio when evaluating a stock
let me know your process in the comments
below you can check out the playlist
on screen now for more educational
videos if you enjoyed the video
give it a thumbs up and as always
subscribe for more and i'll see you
in the next one
[Music]
you
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