Price-To-Book Ratio - P/B Ratio
Categories: Company Valuation
See: Book Value.
The company had 3 primary assets on its balance sheet:
1) It had a factory for which it paid $100 million 3 years ago, depreciating $5 million a year, now held at book value of $85 million.
2) It had made acquisitions by the boatload, so it had $50 million in goodwill from those acqiusitions.
3) It had cash: $80 million.
So the easy book value calc? $215 million. With 100 million shares outstanding, it had book value of $2.15 a share. The price of the stock? $8. So it's about 3.5x book value, or thereabout.
What does that mean? It means that the money the company invested over time grew 350%-ish to today carry a market value of $8 a share. Was the assessment of book value fair? Accurate? Reflective of real values? Eh, maybe, maybe not. Book value in most companies doesn't really mean much. It's kind of a relic of old-timey accounting, when we had little else with which to value companies, and there wasn't...well, technology. The tech industry mangles book value where it truly means next to nothing. But some investors stil like to follow the ratio, and for some industries, like banks/banking, it kind of means something, even today. But that's about it.
Ok, we're closing the book on this one.
Related or Semi-related Video
Finance: What is the Difference Between ...42060 Views
finance a la shmoop. what's the difference between market value and book
value? ever tried to sell sunscreen to a white Walker? yeah [zombie walks through snow]
probably won't make much money. want to know why? now learning about the
difference between market value and book value will tell it all. first market
value it's what the market thinks a stock or a bond or a home or a used car
or whatever is worth. the market the crowd the crazy people.
all right here's an example of market value gone wild in the 17th century [crowd then tulip pictured]
Denmark, they valued a single tulip at 10 grand and it didn't even give them a
triple espresso buzz. go figure. but that's how the market of buyers
valued that tulip so that's what that tulips market value was. that's what the
market said it was worth. Book value however is a completely different in a [man walks through art gallery]
somewhat more rational animal .book value is the dollar amount that a company can
point to which reflects an asset they physically own. imagine buying a tractor
factory for 80 million bucks. it depreciates in value 10 million dollars
a year for 4 years then depreciates that 2 million dollars a year after that. so
after five years that factories Book value ie the amount we're guessing its [chart showing depreciation]
value as actually being is 38 million dollars. but lo and behold the factory
itself is made of Valyrian steel .you know that stuff from Game of Thrones
that kills White Walkers. so after eight years and one white Walker invasion of
Chicago later you decide to sell the factory itself because well the stuff [zombies walk in front of skyscrapers]
it's built out of, that rare material, is suddenly worth a lot more than the
factory .now after eight years the book value of the factory might be 32 million
dollars, but some bitter on eBay of tractor companies offers you a hundred
million bucks! and you accept! that hundred million dollars was the market [man sits behind computer screen]
value of the tractor factory even though the book value said it was worth a whole
lot less. securities actually work the same way. they are traded regularly in a
market place and they reflect their market value even though the book value
at which they are held is often a lot less. and what about Chicago well let's [smiling man carries bags of cash]
just say no one's selling much sunscreen these days.