What is Price-to-Book Ratio?

onlymuks · #1 31st July 2008, 09:03 AM

Quote:

I don’t think Indian equities are still cheap. Sure, the market’s price-to-earnings ratio is now 13.5 or 14, down from a peak of 21x. But the problem with the price-earnings is that the earnings look unrealistically high, and in India, it looks particularly optimistic. If earnings forecasts get cut by another 10-20%, the P/E would go up to 14.5x.
What I would instead tend to rely on is price-to-book. The India market is still trading at a P/B of 3.2. Typically, in a bear market, the Indian market has bottomed at about 2 times P/B. We’re still a long way above that.

Views of HSBC pan-Asia equity strategist Garry Evans as appeared in DNA.

My question is what is Price to Book Ratio?

Source

Alchemist · #2 31st July 2008, 11:00 AM

Price-to-Book ratio is

the ratio of a share's price to its book-value (per share).

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Book value tells us about the net tangible assets of a company.

Assets are important if they are going to be sold-off in near future.

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I don't really bother about book-value.

I would prefer to focus on the money that the company makes and not on what its assets are worth.

onlymuks · #3 31st July 2008, 01:39 PM

Thanks a lot Alchem. Your reply is as usual crisp but full.

Where do we find book value of any company. Does the company publishes the same directly with results or it has to be calculated.

Quote:

Book value tells us about the net tangible assets of a company.

Also I believe by net you means all the assets minus the liabilities. However what is included in assets... buildings, machinery, investments for sure but what about the order book, inventories? Are these also included?

Alchemist · #4 31st July 2008, 10:35 PM

Quote:

Originally Posted by onlymuks

Thanks a lot Alchem. Your reply is as usual crisp but full.

Where do we find book value of any company. Does the company publishes the same directly with results or it has to be calculated.
Also I believe by net you means all the assets minus the liabilities. However what is included in assets... buildings, machinery, investments for sure but what about the order book, inventories? Are these also included?

The company may or may not publish the book-value, but it is not difficult to calculate.

Buildings, machinery, investments, inventories are included, but not order-book.

Order book is not an asset. It is just a list of orders that a company has got. These can even get canceled/modified/renegotiated.

(Work-in-progress and unbilled revenues are included in assets).

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You can calculate the book-value from the balance sheet of the company. (You will need the number of shares that are outstanding).

e.g. take the case of Power Grid Corporation.

1. Go to moneycontrol.com and find the page for PGCL.

2. Open the balance sheet page and the profit & loss account page.

3. Find the value of total assets.

Quote:

Total Assets 19,210.71 20,794.67 22,418.97 25,028.12 30,290.38

4. Find total debt.

Quote:

Total Debt 11,443.28 12,266.38 13,388.04 15,026.13 19,325.50

5. Find number of shares outstanding. (This data is on P&L account page).

Quote:

Shares in issue (lakhs) 303.52 30,352.50 32,040.60 358.46 37,874.07

6. Book value = (Total assets-total debt) divided by the number of shares.

=(30290.38-19325.50)/378.7407

=28.95.

Note:

This is the standalone book-value.

All data on moneycontrol.com is the standalone data.

Consolidated balance sheet will give a different value.

onlymuks · #5 1st August 2008, 08:33 AM

Great reply again.

Is there any value (or band) of this P/B ratio which is considered as good or bad? Is it a factor which is considered in fundamental analysis?

Alchemist · #6 1st August 2008, 10:17 AM

Quote:

Originally Posted by onlymuks

Great reply again.

Is there any value (or band) of this P/B ratio which is considered as good or bad? Is it a factor which is considered in fundamental analysis?

Nothing as such.

Many good companies trade at 5-10 times their book values.

As I said earlier, if the companies can make profits, it doesn't really matter what their assets are worth.

Infosys has a book-value of Rs 235 and is trading at 1575.

Reliance industries has a book-value of Rs 540 and is trading at 2200.

MikeDirnt · #7 7th September 2008, 03:59 AM

some companies may have high PTB value if investors see high future growth in the company.

i forgot the name but there is a test that can justify whether a PTB is suitable for the company. use the following:

PTB < ROE/10

so if you notice that the ROE is high, its natural to have high PTB

Book value can also be calculated by Total Equity(Net Asset) / shares. another better representation is Net Tangible Assets = net asset - intangibles. some people calculate P/NTA instead of P/Book

Alchemist · #8 5th February 2010, 05:47 PM

Quote:

Originally Posted by Alchemist

Book value tells us about the net tangible assets of a company.

That's incorrect.

Sorry.

It should read "Book value tells us about the net assets of a company".

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According to US GAAP:

Intangible assets such as

* Purchased copyrights, patents and other legal rights are

- recorded at historical cost; amortized (impaired if market value falls below carrying value).

* Goodwill is

- recorded at historical cost; not amortized (impaired if market value falls below carrying value).

* Other intangible assets such as brand assets, knowledge assets (R&D assets) are

- not recorded.

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I will have to check what corresponding Indian accounting standards say.

Prudent_Investor · #9 5th February 2010, 09:33 PM

I think you can use the IBM acquisition of Cognos as a nice example of the above.

IBM's Acquisition of Cognos