Price to Book ratio for beginners

The Price Book ratio, P/B ratio, is one of the most sought-after indicators when it comes to value investing. It is calculated as the Price of a stock divided by the Book value per Share. Book value is one of the most conservative measures of a company's value. It is calculated through the balance sheet as the company's assets are tallied minus their depreciation rate (approximated). The next calculation involves dividing the total book value by the total number of shares giving you book value per share. Finally, the price of the stock is divided by the book value per share giving you a ratio. Understanding the ratio is pretty intuitive to understand. If the ratio is greater than 1, the indicator is predicting that the stock is overvalued. Additionally, if it is less than 1, the indicator's prediction is that the stock is overvalued. However, things get more complicated as you compare in between sectors. You can find the stock with the most potential in a certain sector by finding the stock with the lowest P/B ratio. Warning: do not only use this as an indicator when deciding to purchase a stock. 

 

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