The price-to-book value (P/BV) ratio measures current share price of a company relative to book value of equity (BV).
Suppose it is necessary to value O’Key. It is a public company whose main competitors in Russia are Magnit, X5 Retail Group and Lenta.
It is necessary to collect data on companies for the 2nd quarter of 2020.
P/BV (Magnit) = 4.3
P/BV (X5 Retail Group) = 2.8
P/BV (Lenta) = 1
Mean = (4.3 + 2.8 + 1) / 3 = 2.7
O'Key's P/BV is 2.5, below the industry average of 2.7.
P/BV = Price / Book Value
The book value of equity equals to book value of assets excluding book value of liabilities.
Benefits of P/BV:
1. Allows to evaluate the value of the company through its property
2. Suitable for analyzing unprofitable companies
- P/BV>1 — market capitalization exceeds the company's own capital, therefore, the company is considered expensive, the investor overpays for the company's shares;
- P/BV<1 — market capitalization is less than the equity capital of the company, therefore, the company is undervalued, the investor buys the company's shares at a discount;
- P/BV=1 — the company is valued fairly;
- P/BV<0 — the company's liabilities exceed its own assets, which means there is a risk of bankruptcy.
- P/BV>5 — the company's shares are considered highly overvalued, but additionally it is necessary to compare with the average industry values.
According to Ranks methodology, this indicator is analyzed in the Value block and used along with other indicators to calculate the score. The indicator is presented as a % of repurchased shares.
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