What Is A Price-to-Book Ratio?

moneyA price-to-book ratio is one of many ways of valuing a share. It is calculated by dividing the market value of a company by its book value.

A value of less than one could mean that the market is valuing the business at less than its actual worth. The implication is that the market could be underestimating the assets of the business if it should go bankrupt immediately.

The book value is calculated by deducting the total liabilities of the business from its total assets. Some investors prefer to strip out intangible assets because it provides a better picture of the true value of a business if it should be liquidated. Consequently, intangible assets such as goodwill and intellectual property are deducted from the total assets to provide a tangible book value, which is also known as the Net Asset Value.

The price-to-book can be a powerful tool for gauging the value of a business. A high price-to-book could suggest that investors are paying too much for a business. A low price-to-book could imply that the company is undervalued. But be careful… it may also indicate that there might be something wrong with the business.

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