Some Insights for Sharemarket Newbie Investors
Being little bit interested in Sharemarket and do some non-frequent investments into it. I came to know some of the facts which might help Sharemarket Newbie Investors.
These are totally based on my experience, my researches to understand few terms related to Stock markets. Hope these would be helpful to you as well.
Also known as the "price-equity ratio".
Calculated as: A ratio used to compare a stock's market value to its book value.
It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
or
or
Assume a company has $100 million in assets on the balance sheet and $75
million in liabilities. The book value of that company would be $25
million. If there are 10 million shares outstanding,
each share would represent $2.50 of book value. If each share sells on
the market at $5, then the P/B ratio would be 2 (5/2.50).
This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.
Best of all, P/B provides a valuable reality check for investors seeking growth at a reasonable price. Large discrepancies between P/B and ROE (Return on Equity, ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity), a key growth indicator, can sometimes send up a red flag on companies. Overvalued growth stocks frequently show a combination of low ROE and high P/B ratios. If a company's ROE is growing, its P/B ratio should be doing the same.
Another conservative alternative to using a company's reported shareholders' equity (book value) figure would be to deduct a company's intangible assets from its reported shareholders' equity to arrive at a tangible shareholders' equity (tangible book value) amount. For example, Zimmer Holdings' FY 2005 balance sheet reports goodwill (in millions $) of $2,428.8 and net intangible assets of $756.6, which total $3,185.4. If we deduct these intangible assets from its shareholders' equity of $4,682.8 of the same date, Zimmer Holdings is left with a significantly reduced tangible shareholders' equity of $1,497.4. Factoring this amount into our equation, the company has a book value per share of only $6.04, and the price/book value ratio then skyrockets to 11.2 times.
Despite its simplicity, P/B doesn't do magic. First of all, the ratio is really only useful when you are looking at capital-intensive businesses or financial businesses with plenty of assets on the books. Thanks to conservative accounting rules, book value completely ignores intangible assets like brand name, goodwill, patents and other intellectual property created by a company. Book value doesn't carry much meaning for service-based firms with few tangible assets. Think of software giant Microsoft, whose bulk asset value is determined by intellectual property rather than physical property; its shares have rarely sold for less than 10 times book value. In other words, Microsoft's share value bears little relation to its book value.
Source: INVESTOPEDIA
Being little bit interested in Sharemarket and do some non-frequent investments into it. I came to know some of the facts which might help Sharemarket Newbie Investors.
These are totally based on my experience, my researches to understand few terms related to Stock markets. Hope these would be helpful to you as well.
DEFINITION of 'Price-To-Book Ratio - P/B Ratio'
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.Also known as the "price-equity ratio".
Calculated as: A ratio used to compare a stock's market value to its book value.
It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
'Price-To-Book Ratio - P/B Ratio'
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.
Best of all, P/B provides a valuable reality check for investors seeking growth at a reasonable price. Large discrepancies between P/B and ROE (Return on Equity, ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity), a key growth indicator, can sometimes send up a red flag on companies. Overvalued growth stocks frequently show a combination of low ROE and high P/B ratios. If a company's ROE is growing, its P/B ratio should be doing the same.
Another conservative alternative to using a company's reported shareholders' equity (book value) figure would be to deduct a company's intangible assets from its reported shareholders' equity to arrive at a tangible shareholders' equity (tangible book value) amount. For example, Zimmer Holdings' FY 2005 balance sheet reports goodwill (in millions $) of $2,428.8 and net intangible assets of $756.6, which total $3,185.4. If we deduct these intangible assets from its shareholders' equity of $4,682.8 of the same date, Zimmer Holdings is left with a significantly reduced tangible shareholders' equity of $1,497.4. Factoring this amount into our equation, the company has a book value per share of only $6.04, and the price/book value ratio then skyrockets to 11.2 times.
Despite its simplicity, P/B doesn't do magic. First of all, the ratio is really only useful when you are looking at capital-intensive businesses or financial businesses with plenty of assets on the books. Thanks to conservative accounting rules, book value completely ignores intangible assets like brand name, goodwill, patents and other intellectual property created by a company. Book value doesn't carry much meaning for service-based firms with few tangible assets. Think of software giant Microsoft, whose bulk asset value is determined by intellectual property rather than physical property; its shares have rarely sold for less than 10 times book value. In other words, Microsoft's share value bears little relation to its book value.
Source: INVESTOPEDIA
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