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QuestionsValuation using P/B ratio
Jerry Ling asked 5 years ago

Hi there, 
Currently, I am evaluating an asset heavy company, so using P/B ratio. I have few questions to clear :

  1. For P/B ratio, is it the same as NAV?
  2.  Formula of P/B ratio = Total assets – total liabilites – intangible assets. Is this correct?
  3. What ratio is considered undervalue, fair value and overvalued?
  4. What is the reason when company share price is traded under its P/B ratio?

Hope for your advise. Thanks. :)

Jieren Zheng replied 5 years ago

PB is Price to Book ratio, so Share price divided by Book Value/NAV per share.
NAV is generally Shareholders’ equity, then NAV per share, you divide it by number of shares outstanding (or diluted if you wanna be more conservative).

General rule of thumb, 1.0 is fair, below is undervalued, above is overvalued. But it depends on industries as well as the condition of the company.

There could be many reasons such as if the company balance sheet is doubtful (i.e. Noble) to developers which have yet to “unlock value” (still building those houses, yet to finish, yet to sell) to conglomerate discounts/shell company.

1 Answers
Victor Chng answered 5 years ago

Hi Jerry,
I think Jieren has answer all your questions. To add on to what he have say, when you look at PB average find the average PB trading range for the companies. Always buy below their average trading range to be safe.
 
Hi Jieren,
 
Good job :) 

Jieren Zheng replied 5 years ago

Thank you for your kind words :)