What is pb ratio : what is a good pb ratio
PB Ratio is a financial ratio that helps investors to compare a company’s current market value to its book value. The full form of PB Ratio is Price to Book Ratio.
The formula for the PB ratio is as follows:
PB Ratio = Market Price per share ÷ Book Value per Stock
Market value per share is the current value of the company’s share on the stock exchange. The company’s book value is the total value of its Assets minus its total liabilities.
Book Value of Co. = Total value of Co. Asset – Total value of Co. Liabilities
Book value per share can be calculated by following
Book value per share = Book value of company ÷ Total No of shares
Normally ‘1’ is considered as ideal PB Ratio. If the PB Ratio of stock is more than ‘1’, It is said that the Stock is trading at a price that is more than its book value. This means the Stock is overvalued.
If the PB Ratio of stock is less than 1. It is said that the Stock is trading at a price that is less than its book value. This means the Stock is undervalued. It is the best time to invest in stock.
We will try to understand the concept of PB ratio by taking the following example about Companies A and B.
| Company A | Company B |
| Suppose Company A has per per-share value of Rs. 100. And Book value of Rs. 60. | Suppose Company B has per per-share value of Rs. 150. And Book value of Rs. 50. |
| PB Ratio = 100 ÷ 60 PB Ratio = 1.66 | PB Ratio = 150 ÷ 50 PB Ratio = 3 |
| This means that Company A is overvalued by 1.66 times as compared to its book value. You have to pay less money as compared to its book. | This means that Company B is 3 times overvalued as compared to its book value. You have to pay 3 times more money as compared to its book. |
What is Good PB Ratio.
The investor has to be very careful while using the PB Ratio for analyzing the company’s stock. PB Ratio cannot be applied blindly to all stocks of the market. Having less PB ratio is not the only criteria for investing in the company. Many other factors should also be considered before making a final judgment about investment.
Some sectors like computer software companies, hold fewer physical assets like plants, raw materials, and machinery. Their main asset is their employees. They help to earn profit for the company. So, the Book value of software companies is less. Obviously, the PB ratio of software companies is always on the high side. You can check this by checking the PB ratio of TCS or Infosys. Their PB ratio is always on the higher side. They are most of the time overvalued if we consider only the PB Ratio factor of these companies.
PB Ratio won’t work in cases when the Company holds a famous brand or holds different patent rights or licenses. PB ratio factor won’t work for the companies that hold more intangible assets like patents, and licenses.
Only by checking PB Ratio, an investor should not decide to invest in the company. Investor has to study the company’s business model also. PB ratio won’t work in the case of companies that are holding depreciating assets like plants, and materials. It will work very well in case of companies holding appreciating Assets. PB ratio is more accurate for the Banking Sector, Gold lending financial companies, Real estate companies. These companies hold appreciating assets and their value can be accurately calculated.
Conclusion.
1.. PB Ratio compares the company’s market value to its book value. When selecting a stock for investment, the PB ratio is one of the important factors. But It should be used with other parameters to make the right investment decision.
2. PB Ratio helps us to give an idea about the valuation of a company’s Asset.
3. Traditionally, If the company’s PB ratio is less than 1, then the Company’s share is undervalued. If it is more than 1, it is overvalued. Many Value investors think that a PB Ratio of less than 3 is ideal.
4. PB ratio works well for companies having appreciating assets like the Banking Sector, Gold Mortgage Companies, and Real estate companies. Having definite appreciable tangible assets.
5. PB Ration has limitations while applying to companies having depreciating Assets. PB Ratio will not work in case of companies having more intangible assets like patents, licenses, etc. It will also not work in the case of technology and innovative sectors, because for them, employees are their assets. They play an important role in earning profit for companies. However one cannot show Employees as an asset in the balance sheet. PB ratio of technology sector companies is always high.
Frequently asked questions.
1.. What is formula for PB Ratio
PB Ratio = Market Price per share ÷ Book Value per Stock
2. What is Full form of PB Ratio
The full form of PB Ratio is Price to Book Ratio.
3.. What is good PB Ratio
There is no thump rule for deciding a good or bad PB Ratio. It depends upon the company’s business model and sector. Traditionally, when the PB ratio is less than 1, the stock is said to be undervalued. When the PB ratio is above 1, it is overvalued. for some value investors, a PB ratio of less than 3 is considered a good PB Ratio.
4. Which is good PE Ratio or PB Ratio
It depends upon the company’s business model and sectors which ratio is more useful. PE ratio tells us how much money an investor is ready to pay for 1 rupee of its earnings. Whereas the PB Ratio tells us about how much money investors are ready to pay for 1 rupee of book value. Both ratios should be applied after considering the business model and sector of the company. Other related factor should also be taken into consideration before investing.
PE Ratio = Share Prince ÷ EPS ( Earning Per Share )
PB Ratio = Market Price per share ÷ Book Value per Stock