What is P/B Ratio?
P/B Ratio compares stock price to book value per share. It shows how much investors pay for each dollar of net assets. P/B < 1 might mean undervalued.
Think of it like this
Buying a house: Book value is like the cost to build it from scratch. If you can buy it for less than construction cost (P/B < 1), it might be a bargain!
Formula
P/B = Stock Price / Book Value Per Share- Stock Price: Current market price
- Book Value: Assets minus liabilities per share
Why it matters
- Values company based on assets
- P/B < 1 might signal undervaluation
- Important for asset-heavy companies
- Banks and financials rely on P/B
What's a good value?
< 1
Potentially Undervalued
Trading below book value
1-3
Fair Value
Normal for most companies
3-5
Premium
Growth or quality premium
> 5
Expensive
High growth or overvalued
Real-world example
Bank of America P/B: 1.2 - typical for banks. Amazon P/B: 15 - investors value future earnings over current assets. Distressed company P/B: 0.5 - might be a value trap or opportunity.
Things to watch out for
- Book value can be outdated
- Doesn't capture intangible assets well
- Tech companies often have high P/B
- Low P/B might signal problems
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