Value analysis is the best approach to identify the right deals. While the price-to-earnings (P / E) and price-to-sell (P / S) valuation tools are more commonly used for stock selection, the price-to-book ratio (P / B ratio) is also a metric to use to identify low priced stocks with high growth prospects.
The P / B ratio, sometimes referred to as the market-to-book ratio, is used to calculate how much an investor must pay for every dollar of a stock’s book value. It is calculated by dividing the current closing share price by the book value per share for the last quarter.
P / B ratio = market capitalization / book value of equity
Now let’s understand the concept of book value.
What is book value?
There are several ways to define the book value. Book value is the total value that would remain, according to the company’s balance sheet, in the event of immediate bankruptcy. In other words, this is what shareholders would theoretically receive if a company liquidated all of its assets after paying off all of its liabilities.
It is calculated by subtracting total liabilities from total assets of a business. In most cases, this is equivalent to common shareholders’ equity on the balance sheet. However, according to the company’s balance sheet, intangible assets must also be subtracted from total assets to determine the book value.
Understanding the P / B Ratio
By comparing the book value of equity to its market price, we get an idea of whether a company is undervalued or overvalued. However, like the P / E or P / S ratio, it is always best to compare P / N ratios within industries.
An AP / E ratio of less than one means the stock is trading below its book value or the stock is undervalued and therefore is a good buy. Conversely, a stock with a ratio greater than one can be interpreted as being overvalued or relatively expensive.
For example, a stock with a P / N ratio of 2 means we pay $ 2 for every $ 1 of book value. Thus, the higher the P / B, the more expensive the action.
But there is a caveat. An AP / E ratio below one can also mean that the company is generating low or even negative returns on its assets, or that the assets are overvalued, in which case the stock should be avoided as it can destroy shareholder value. Conversely, the share price can be significantly high – thus pushing the P / B ratio to more than one – in the probable event that it has become a takeover target, reason enough to hold the share. ‘action.
In addition, the P / B ratio is not without limits. It is useful for businesses – like finance, investment, insurance, and banking or manufacturing companies – with many liquid / tangible assets on the books. However, it can be misleading for companies with large R&D spending, high debt, service companies, or those with negative profits.
In any case, the ratio is not particularly relevant as a stand-alone number. You have to analyze other ratios like P / E, P / S and debt / equity before arriving at a reasonable investment decision.
Price to Book (Common Equity) below the X-Industry median: A lower P / B than the industry average implies that there is enough room for the stock to win.
Sales price below the X-Industry median: The P / S ratio determines the market value for every dollar of the company’s sales / revenue – a lower ratio than the industry makes the stock attractive.
Price / profit using an F (1) estimate lower than the X-Industry median: The P / E (F1) ratio values a company based on its current stock price relative to its estimated earnings per share – a lower ratio than the industry is considered better.
PEG less than 1: The PEG relates the P / E ratio to the company’s future growth rate. The PEG report gives a more complete picture than the P / E report. A value less than 1 indicates that the stock is undervalued and that investors should pay less for a stock that has good prospects for earnings growth.
Current price greater than or equal to $ 5: They must all trade at a minimum of $ 5 or more.
Average volume over 20 days greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.
Rank of Zacks less than or equal to # 2: Zacks Rank # 1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.
Value Score Equal to A or B: Our research shows that stocks with a value score of A or B when combined with a Zacks # 1 or 2 rank offer the best opportunities in the value investing space. .
Here are four headlines that qualified the screening:
Alexion Pharmaceutical ALXN, a leading biotech, has a 3-5 year BPA growth rate of 17.8%. He currently has a Zacks Rank # 2 and a Value Score of B. You can see The full list of today’s Zacks # 1 Rank stocks here.
Adient plc ADNT, the world’s largest supplier of automotive seats, has a projected 3 to 5 year EPS growth rate of 32.1%. He currently has a Zacks Rank # 2 and a Value Score of B
Affiliated Managers Group AMG, a global asset manager, is currently a # 2 ranked stock by Zacks. It has a 3-5 year BPA growth rate of 15% and a value score of A.
General Motors Company GM, a leading automotive company, currently has a Zacks Rank # 1 and Value Score of A. It has a 3-5 year EPS growth rate of 9.9%.
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Alexion Pharmaceuticals, Inc. (ALXN): Free Stock Analysis Report
General Motors Company (GM): Free Inventory Analysis Report
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Adient PLC (ADNT): Free Stock Analysis Report
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