What is the price ratio to the book?

The price ratio to the book is a measure of value used by financial analysts and investors. It represents the market value of equity in relation to the accounting value of its own capital and gives the idea of ​​whether the investor pays too much for what would remain if the company immediately went bankrupt. While the price ratio to the book does not mean anything about the company's ability to generate shareholders' profit, it is usually used to indicate whether the shares are overvalued or undervalued. Companies requiring more infrastructure capital, such as a manufacturing company, tend to trade in a lower price for a book for a book than a company requiring less capital, such as a consulting company. The higher price ratio to the book usually suggests that investors expect the management to create a larger value of current assets or that the market value of the company's assets is significantly higher than the accounting value.

There are two common ways to calculate the price ratio to the book. The most common way that is calculated is dividing the market value of your own capitalby the value of equity. Alternatively, the company's market capitalization can be divided by the total accounting value contained in its balance sheet. The ratio of the price to the book can also be determined by calculating the difference between the return on equity and the required level of return on its projects. Regardless of the methods used, the price ratio to the book will be the same; It is presented as the only numerical value, also called a multiple.

price ratio to a book or multiples less than one would mean that the company's shares are lower than their book values ​​on the market; In other words, the company is undervalued. Less than one price ratios are common in the case of economic inflation or if there is a poorly powerful market. When the company is overvalued, the price ratio to the book will be higher than one. Historically, when economic and stock markets are strong, companies traded over the ratio of the book, indicating the potential that the stocks under their current accounting value transmit.

There is a strong relationship betweenRatio of prize to the book and return on equity. Companies that have a high return on their own capital tend to sell above the accounting value, while companies with low return on equity tend to sell for or below the accounting value. Investors should usually pay careful attention to companies that show the inconsistency of the price of the price to the book and the revenues of their own capital, the low price for the book and the high return on equity, or vice versa.