Price to Book Value Formula (Table of Contents)
- Price to Book Value Formula
- Price to Book Value Calculator
- Price to Book Value Formula in Excel (With Excel Template)
Price to Book Value Formula
The price to book value can be defined as a market value of a firm’s equity divided by the book value of its equity. It is also called market to book ratio.
Here’s the Price to Book Value Formula –
Example of Price to Book Value Formula
Let’s take an example to find out the price to book value ratio for a company X: –
The book value per share can be found out by dividing the Book Value of Equity of the company divided by the total shares outstanding in the market.
- Book Value of Equity = Total Assets – Total Liabilities
- Book Value of Equity = Total Shareholder’s equity in the company
- Assuming Book Value of Assets for company X = Rs 30 million
- Total Shares Outstanding in the market = 1 million
- Market Share price = Rs 100
- Book Value per share = Book Value of Equity / Total Shares Outstanding
- Book Value per share = 30 / 1
- Book Value per share = Rs 30 per share
- Price to Book Value = Market price per share / Book Value per share
- Price to Book Value = Rs 100 / Rs 30
- Price to Book Value = 3.33
Taking assumed values for the following: –
Comparison of P/B is generally done between the peer group and industry average. Company X has a P/B lower than the industry average and lower than its peer group which highlights that X might be undervalued. Company Y has P/B equal to industry valued and it can be assumed that the Y’s stock is correctly valued. Company Z has P/B greater than its peer group and also higher than the industry average. Hence it can be assumed that the company’s stock is overvalued in the market. But it must be remembered that P/B is one of the indicators for the valuation of a company or stock but it should not be a sole criterion to judge whether a stock is overvalued or undervalued.
Price to Book Value alone does not indicate anything substantial about the company’s financial health. It is used for relative valuation where companies operating in the similar industry can be compared with each other. Often firms with low price to book values in comparison to its peers are considered value stocks while firms with a high price to book values are considered growth stocks. The more optimistic the investors are about the firm’s future growth, the greater its price to book value ratio.
Price to Book Value is generally preferred metric for financial companies, banks etc. This is because due to regulations they have to mark to market their assets regularly and hence their book value accurately reflects the market value of their assets. This is not true for other companies and hence price to book value becomes an essential metric while comparing financial companies.
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Adjustments are also made to P/B ratio while the comparison between different stocks. One of the adjustments that are made is the use of tangible book value where intangible assets are subtracted from the book value of equity. Goodwill and patents are few of the example of intangible assets which needs to be removed from the book value of equity for better comparison. Also, another example of adjustments is the removal of off-balance sheet assets and liabilities. Inventory adjustments are also required while comparing P/B ratios of companies in the same industry. A company using First In First out (FIFO) for inventory valuation cannot be compared with another company in a similar industry which is using Last In First Out (LIFO) for its inventory valuation.
Significance and Use of Price to Book Value Formula
The advantages of using the Price to Book Value ratio Formula are: –
- Book value is an amount which is generally positive even when the company reports a loss in its Profit and Loss statement. Hence P/B is an effective measure in comparing companies when P/E cannot be used for these firms.
- Book value does not change frequently which means that is a useful measure in comparing companies whose EPS is particularly low, high or volatile.
- Book value is an effective measure of valuing banks, financial companies etc. since they are marked to market frequently and hence give an apt comparison.
- P/B measure is effective in valuation of companies that are about to go out of business.
- P/B can be useful in valuing companies that are expected to go out of business.
- Research suggests that P/B actually explains the dissimilarities in long run average stock returns.
Some of the disadvantages of using Price to Book Value ratio Formula include: –
- One of the disadvantages is that P/B doesn’t accurately reflect intangible economic assets e.g. human capital.
- There are sometimes significant differences in the business models of various firms operating in the same industry. For example, a company might be outsourcing its production and hence this firm will be having fewer assets, lower book value which would overstate its P/B value than another company which is doing its production in-house.
- Also, various accounting conventions used by different companies can conceal the true investment in the company by its shareholders which decreases the comparability of P/B across firms and countries. For example: – In the United States, the convention followed is that Research and Development costs are expensed which can understate capital investment.
- External factors such as inflation and changes in technology can significantly alter the book and market value of assets which decreases the importance of book value as a measure of shareholder’s investment. This would decrease the comparability between firms using P/B ratio.
Price to Book Value Formula Calculator
You can use the following Price to Book Value Calculator
|Price to Book Value Formula=||=||
Price to Book Value Formula in Excel (With Excel Template)
Here we will do the same example of the Price to Book Value formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Market price per share and Book Value per share
You can easily calculate the Price to Book Value using Formula in the template provided.
First, we need to Calculate Book Value of Equity.
Then, we need to calculate Book Value per share
Now, we can calculate Price to Book Value using Formula
Conclusion – Price to Book Value Formula
P/B ratio is generally used by value investors since the basic foundational belief of value investing is that markets are inefficient and hence the actual book value of a company is not priced into the market price of the share. P/B ratio below the market averages may indicate that a firm is undervalued and represents a buying opportunity.
This has been a guide to a Price to Book Value Formula. Here we discuss its uses along with practical examples. We also provide you with Price to Book Value Calculator with downloadable excel template. You may also look at the following articles to learn more –