Price to Book Ratio

Price-to-Book Ratio (PB) refers to the ratio of stock price divided by net assets per share.

Net assets per share (Book Value) refers to the company's total assets minus total liabilities, divided by the total equity.

The formula for calculating the price-to-book ratio is: price-to-book ratio = market price per share / net assets per share

For example: a company's total assets are 10 million yuan, total liabilities are 4 million yuan, total share capital is 1 million shares, and the market price per share is 10 yuan, then the company's net assets per share are (1000 - 400) / 100 = 6 yuan, the price-to-book ratio is 10 / 6 = 1.67.

The role and significance of price-to-book ratio

The price-to-book ratio reflects the market's evaluation of the company's net asset quality, and also reflects investors' expectations for the company's future profitability.

The lower the price-to-book ratio, the lower the price paid by investors relative to the company's book value, which means that investors can obtain higher returns at lower costs, and the investment risk is relatively small.

The higher the price-to-book ratio, the higher the price paid by investors relative to the company's book value, which means investors need to bear higher costs and risks in order to obtain expected returns.

Generally speaking, a price-to-book ratio between 1 and 3 is a normal level, a price-to-book ratio below 1 is an underestimation, and a price-to-book ratio above 3 is an overvaluation.

How to use price-to-book ratio to select stocks?

The price-to-book ratio is a relative indicator and cannot be used alone. It must be combined with other factors for comprehensive analysis.

Industry characteristics and differences should be considered. The price-to-book ratio levels of different industries are different and cannot be simply compared. Generally speaking, industries with strong growth potential, high technological content, obvious competitive advantages, and high profitability will have higher price-to-book ratios; conversely, the price-to-book ratio will be lower.

Consider the company's operating conditions and development prospects. Within the same industry, the price-to-book ratios of different companies will also vary. Generally speaking, companies with stable operations, performance growth, financial health, and great development potential will have a high price-to-book ratio; conversely, a company with a low price-to-book ratio.

Consider market conditions and sentiment. Factors such as market supply and demand, good and bad news, investor psychology, etc. will also affect the price-to-book ratio. Generally speaking, in a bull market, market sentiment is high, investors are optimistic, and the price-to-book ratio will be high; in a bear market, the opposite is true.

Summary

The price-to-book ratio is an important stock investment analysis indicator, which can help investors determine whether a stock is overvalued or undervalued.

However, the price-to-book ratio is not the only evaluation criterion, and a comprehensive judgment must be made based on industry characteristics, company operating conditions, market environment and other factors.

When selecting stocks, it is necessary to comprehensively use a variety of indicators and methods to conduct comprehensive analysis and comparison, in order to find high-quality stocks with real investment value and potential.