Wednesday, August 22, 2007

Price To Book Ratio

The Price To Book Ratio is one tool of a financial analyst.

Calculating it is a fairly simple task. Take the market price per share and divide it by the book value per share. If you don’t know where to find the market price for your stock, it’s as simple as can be. Just look up the current stock price on a site like Bloomberg or Yahoo Finance.

Finding the book value per share is slightly trickier. First we will need to find the book value of the company. Go to the company website for the Annual Report, since that’s probably the quickest and most accurate location of the financial statements. If you can’t get the annual report, you can get the information off of the web. Now, take the total assets listed in the balance sheet and subtract all of the intangible assets. This will leave you with the value of assets that you can touch and feel. That’s the book value.

Then take the book value of the company and divide it by the number of shares outstanding. The number of shares outstanding can also be found on the balance sheet. There you have it, the Price To Book Ratio.

As an example, let’s take a look at Intel’s book to value (2006), since I currently own some shares in it. We can see that Intel has total assets of $48,368 million. There are intangibles such as goodwill that need to be subtracted. $48,368 - $3861 = $44,507 million. Then we take the $44,507 and divide it by the number of shares, which is 5766 million shares. $44,507 / 5766 = $7.718 book value per share. Then we can find today’s market value. For Intel, right now the market value is $24.07.

Market Per Share / Book Per Share = $24.07 / $7.718 = 3.12

The Price To Book is not always helpful, but can sometimes be useful for long term value investors. If the market price of a stock is lower than the book value, this may be a sign of a significantly undervalued stock. Use of a calculator or a good stock screener may help an investor find these undervalued stocks. Remember, the Price to Book ratio is just one tool. You should use multiple tools when researching investments.

Thanks again for sticking with me for another blog entry. I’m still learning, so if there is anything I calculated incorrectly or any information you’d like to add, please post a comment.

----------Sincerely, Trevor Stasik

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