How to Analyze Stocks by P/B (P/BV) Multiplier?
The P/B stands for Price/Book. This multiplier (coefficient) represents the price of the company’s assets minus its liabilities in case the company is liquidated.
The use of P/B (P/BV) for stock analysis is somewhat limited: it does not suit certain sectors of economy. This article is devoted to the peculiarities of this multiplier and examples of its use for stock analysis.
P/B (P/BV) values
The P/B (P/BV) coefficient reveals the cost of the assets the company owns, minus its liabilities (debts, expenses), which can be sold in case the company needs to be liquidated.
For all public companies, P/B (P/BV) values are available in various screeners normally used for choosing stocks for investments. Using this multiplier as a choice criterion, mind that it does not let you adequately compare companies from different sectors of economy. Its values can be interpreted as follows:
- P/B (P/BV) below 1 – investors pay less than a dollar per dollar of the stock price.
- P/B (P/BV) above 5 – investors pay over 5 dollars per dollar of the stock price.
Same principle is used for any other value.
Theoretically, the smaller the P/B (P/BV) value, the better for investments. In practice, things are slightly more complicated.
- A negative value of the multiplier (below zero) means that the company has more liabilities than assets. This might forecast bankruptcy.
- A value between zero and one means that the company is undervalued,
- If P/B (P/BV) is one, this means the company’s assets equal its market price. This is an investor’s standard.
- A value over one demonstrates that investors are ready to pay more than the company’s real market price is.
Analyzing companies by P/B (P/BV)
As an example, let us analyze companies from the banking sector: they are suitable for analysis by this indicator because financial organizations cost their real market price thanks to the balance of assets and liabilities.
UBS Group AG
As you can see on the screenshot above, the P/B value for the UBS investment bank is one, which means the company’s assets and liabilities are perfectly balanced. Hence, the shares of the company are likely to keep growing in the nearest future – and this is exactly what we see on the chart.
After a correction, the quotations kept growing and renewed the highs. Based on P/B values, you can male some prelim conclusions about whether the quotations will grow, but for more precision, you need more data, such as other multipliers.
Royal Bank of Canada
Now to the Royal Bank of Canada. On the screenshot above you see that the P/B value is 2.09, which means that investors are ready to pay more than the company really costs in the market. In the future, this might be harmful, and the quotations might keep on declining and come in a fair balance of assets and liabilities.
As you can see on D1, the stock price keeps declining, heading for the support area. This might be because the company is overvalued, so that speculators started selling the stocks in a hope to make money on short positions. In the future, when the price drops to acceptable levels, investors will get interested again, and the bank will attract new capital via purchases of stocks by market participants.
And now – to an example, where the P/B value does not work as well as for the banking sector.
Aspen Technology Inc
As you see above, the multiplier is 13.44, which means that the company is overvalued, and the cost of its assets is much lower that its market price.
As long as Aspen Technology Inc develops software, you simple cannot rely on P/B. The company, in fact, has very limited physical assets, the main part is made of non-material ones (patents and licenses) that are not taken into account by P/B. That is why the multiplier is useless here.
As you see on D1, the quotations have been moving sideways for a short while, with no trustworthy trading signals. This means the company is stagnating and is not attractive for investments. On the other hand, IT and everything around it is on leading positions compared to, say, heavy industry.
Hence, analyzing and comparing companies from IT and high tech spheres by P/B is just useless,
Is P/B (P/BV) worth using at all?
After looking at the examples, let us discuss pros and cons of the multiplier.
Advantages of P/B
- It gives investors an idea of how much they pay for the company’s assets.
- P/B (P/BV) is more stable than the net profit.
Drawbacks of P/B
- IT sphere cannot be analyzed by this.
- Only companies from the same sphere can be correctly compared.
- Companies that use different reporting forms cannot be compared adequately.
- It does not show the profitability and turnover of the capital.
The P/B (P/BV) multiplier is a useful criterion for choosing companies for investments; however, you need to check the sphere in which the company works when using this multiplier.
When choosing a company for investment, it will be more accurate to use a multi-facet approach that includes a group of indicators, such as P/E (Price/Earnings), P/S (Price-to-Sales), P/BV (Price-to-Book), fundamental values, and tech analysis.
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