The “What Is…?” series helps beginner investors understand investing terms in a simplified manner.
In this instalment, let’s understand more about the term, “price-to-book ratio”.
So, What Is Price-to-Book Ratio?
The price-to-book (P/B) ratio is a valuation metric that’s commonly used to value asset-heavy companies.
If a particular company is asset-light, such as technology companies, it would be better to use other valuation metrics, such as price-to-earnings (P/E) ratio, to value it.
P/B Ratio Formula
The P/B ratio is determined by taking a company’s share price divided by its book value per share.
The book value (also known as net asset value) is the difference between a company’s assets and its liabilities.
This value is then divided by the number of outstanding shares.
The formula to calculate the P/B ratio is:
Book Value = Total Assets – Total Liabilties
Book Value Per Share = Book Value / Outstanding Share Count
P/B Ratio = Stock Price / Book Value Per Share
If a company’s P/B ratio is below 1, it could mean that it’s undervalued, and vice versa.
Calculating P/B Ratio of a Listed Company
To illustrate the use of P/B ratio, let’s use SPH REIT (SGX: SK6U) as an example.
As of 29 February 2020, the retail REIT had a book value per unit of S$0.95.
(Note: Most companies present their NAV per unit data in their accompanying notes to financial statements so our life is made much easier.)
At its current unit price of S$0.88, SPH REIT has a P/B ratio of 0.93x.
Since the P/B ratio is below 1, it could mean that SPH REIT is undervalued.
To determine if the REIT is indeed cheap, we have to dig deeper into its historical financial performance and future prospects.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.