Price To Book Ratio Defined

What does the Price To Book Ratio show us?  Price to Book ratio, also called P/B Ratio, is a ratio showing the price of a stock versus total equity.  An analyst may use market capitalization as a ratio compared to the total equity of a company.  Theoretically, if a company’s stock’s price is below its total equity then this stock could be undervalued.  A company’s total equity is the total of its assets, less liabilities.  This is total equity.  Then, you would compare the total market capitalization to total equity.  This is done by dividing market capitalization by total equity.  You are left with a ratio.  Given this, what is a good price to book ratio?

Total equity, shareholder equity, and/or book value are all interchangeable.  This is the amount the company feels its assets are worth, less liabilities if the entire company were to be liquidated.  These assets are subjected to depreciation and amortization deductions when they are factored in.  Given this, if total equity were not realized in market capitalization, someone analyzing the stock would want to know why.

Normal Price To Book Ratio

What is Price To Book Ratio or, P/B Ratio and what is a good price to book ratio showing how to compare price to book ratio
What is a good price to book ratio?

A Google search of the term “Average Price To Book Ratio for S&P 500” shows these numbers (As of April 2022):

  • Mean: 2.92
  • Median: 2.79
  • Low: 1.78 (March 2009)
  • High: 5.06 (March 200)

Of all of the S&P 500 prints, the average at 2.92 gives an idea of where you could compare any one particular company and how it compares to other companies.

The standout for this is that the lowest point that the S&P 500 printed for Price To Book Ratio is March 2009.  This was immediately after the complete collapse of the market due to the financial crisis.

The other standout is the high Price To Book Ratio printed in March 2000, whereas the peak in the Dot Com era was in May 2000.  From there, the Nasdaq alone lost some 80% of its value.  The average and the high and low give us an idea of what to look for with regard to where a company should fall.  Anything above or below would merit looking into.

Complete List of Cannabis Stocks Price To Book Ratio

I have listed all of the stocks I cover and ordered them sequentially, declining, with total Q3 equity compared to market capitalization in the Price To Book Ratio post.  A better understanding of price ratios is explained all through the Value Investing Video Course series in the video for Price Ratios.  Understanding all of these principles is one of the most important things a new investor can get involved in.

Price To Book Ratio Above 1

If you see a Price To Book Ratio above 1, then the market is pricing in the total equity of the company as well as an intrinsic value which would be the value of the company’s potential to provide profits beyond just the equity on the books.  How fast a company is growing revenues, profits, and increasing assets will all factor in to what goes into the company’s intrinsic value.

Price To Book Ratio below 1

Is a price-to-book ratio below one necessarily a buy signal?  Not necessarily.  If you were to suppose that a company had $50M in total equity and, perhaps $5M in cash, is not profitable, but a cash-burn rate of $2.5M per month, this is a company that will be quickly running out of cash.  Given that, this company would be in need to raise cash soon and likely that would be either with debt financing or issuing new stock.  In both of these cases, the price-to-book ratio would be changing.

Understanding How To Invest In Stocks

The principles of how to invest in stocks are all laid out for you in a complete video course that is free on my YouTube channel: Stock Market For Beginners – How to Invest in Stocks.  This complete video course lays out all you would need to know if you are a stock market for beginner and want to better understand how to invest in stocks.

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