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Price to Book ratio

Questions › Category: Valuation Quadrant › Price to Book ratio
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Carolyn Goh asked 2 years ago

Hi Victor, 
In the course, it is mentioned to use PB ratio to evaluate companies which are asset heavy. What’s the reason behind this and how will the ratio usually compare to using PE for asset heavy companies (more conservative?) 
Regards,
Carolyn

Jieren Zheng replied 2 years ago

Asset heavy companies generally use their assets to generate their revenue, so we kinda measure by the multiple of their net worth.

Certain companies with significant depreciation (industrial) or fair value gains (property) would skew earnings and might not make it as meaningful.

Victor Chng replied 2 years ago

Thanks JR

6 Answers
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Victor Chng answered 2 years ago

Hi Carolyn,
 
It is as what Jieren had mentioned above.

Carolyn Goh replied 2 years ago

got it thank you! what i’m hearing is that the key thing is that Asset heavy companies have large depreciation / FV gains which makes earnings more volatile hence earnings is not recommended as the base.

Victor Chng replied 2 years ago

Yes, the earnings may be distorted due to depreciation. Since it is a asset companies, PB is the ideal valuation method as other investors will also use the same.

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James Lim answered 1 year ago

Hi,
 
How do you determine whether a business is asset light or asset heavy? Your tutorial says it should be fixed asset/total asset to find the percentage. What is a good percentage for asset light business?

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Victor Chng answered 1 year ago

Hi James,
Asset business that require to use PB are like property, banks and insurance.
Generally, those asset light companies are below 60%

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James Lim answered 1 year ago

Hi,
 
In your Price to Book tutorial you did not teach us how/where to find the book value. Do we take total assets – total liabilities?

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James Lim answered 1 year ago

Hi,
 
In your Price to Book tutorial you did not teach us how/where to find the book value. Do we take total assets – total liabilities?

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Victor Chng answered 1 year ago

Hi James,
 
The book value is the shareholder’s equity. It can be found under the balance sheet segment of the course. Please see below:
 

Shareholders’ Equity