Knowing More About Price to Book Value (PBV)

About Price to Book Value (PBV)

PBV is one fundamental indicator that is usually used by investors to find out the state of a company before deciding to buy shares. This ratio is used to analyze whether a company is under valuated or over value. The smaller PBV ratio means that the stock is getting cheaper and vice versa. PBV is calculated based on the company’s current stock price with its equity value. Usually PBV is compared to a fixed reference in determining its valuation  :

• PBV > 1 : Then the stock price is already above its fair value (Over Value)
• PBV < 1 : Then the share price is below the fair price (Under Value)

What is book value?

Book value is the value of equity divided by the number of shares available. It can be said that book value is the value of equity per share. In theory this is the value that will be obtained by the shareholder if the company is liquidated. So the value of the book value is very meaningful to see the returns on investment. In PBV analysis it is very important to know the type of book value of the company. Peter Lynch, investor from America said for book value that is getting closer to the final product, it will be increasingly difficult to determine its value. For example, we know the price of leather, but what’s the value after becoming a brown wallet.

PBV ratio vs Market Prices

Often we found on the market there are stocks that have a large PBV. This is due to the application of an accounting system that does not provide value to intangible assets such as brands and prospects of a company. Therefore, there are many companies that have PBVs far above 1 and can reach tens, which is reasonable when viewed from the company’s ability to generate profits and well-known brands. On the other hand PBVs below 1.0 can indicate the company has not a good prospect. That’s why there are far differences between market value and equity value itself.

How To Calculate PBV ?

The formula is :

PBV= Price / Book Value per Share (BVPS)

Book Value  per Share = Total Equity/Outstanding Share

• Price to book value is the stock price per share divided by the book value per share.
• The stock price per share can be found as the amount listed as such through the secondary stock market.
• The book value per share is considered to be the total equity for common stockholders which can be found on a company’s balance sheet.

Example, comparation between TLKM and EXCL, these companies are in the same industry, noted that in 2017 the closing price of TLKM shares was IDR 4,440.00 and EXCL was  Rp 2,960.00.

Based on the above data can be calculated :

• TLKM

Book Value TLKM = Total Equity/Outstanding Share = (112130-19417)/101 = 917.95

PBV TLKM = Price per share/( Total Equity/Outstanding Share) = 4400/((112130-19417)/101)) = 5.22

• EXCL

Book Value EXCL = Total Equity/Outstanding Share= 21631/11= 1966.5

PBV EXCL = Price per share/( Total Equity/Outstanding Share)= 2960/(21631/11)= 1.5

From the comparison, the company above can be seen that the EXCL PBV is smaller, which means that when we buy EXCL shares at the price of 2960, we buy a little above the book value. In contrast to TLKM, the PBV is at 5.22x, the stock price is far above the book value. Based on value investing analysis, of course EXCL shares look cheaper than TLKM. Things that need to be considered in analyzing PBV must be seen also the qualitative factor of a company. For example TLKM, even though PBV from TLKM is higher, but he has many subsidiaries. Where of course all TLKM subsidiaries are likely to use TLKM services as well so this is what drives the value of a large TLKM PBV ratio.

The Conclusion is not all shares that have PBVs below 1.0 are undervalued shares. It could be that these stocks do have a low PBV because the company loses so that in later years the book value will decrease. If there is an event like this, it is only natural that the company has a PBV that is low and does not indicate that the company is undervalued. Conversely, stocks that have a high PBV can also not indicate that the stock is overvalued because the company may have good prospects and performance and a well-known brand. So from that all make the stock price has a premium valuation compared to stocks that have a lower PBV but with a lower prospect as well.

Source :

• Gitman, Lawrence J., and Chad J. Zutter. Fourteenth Edition. Principles of Managerial Finance
• http://financeformulas.net/Price_to_Book_Value.html
• http://zomiwijaya.com/step-4-analisa-fundamental/
• https://stockbit.com/#/stream

About Post Author

Indramin

Indra Aminudin is a students at the MBA ITB. Now working at PT. Huawei Tech Investment as Strategic Radio Planning, have a vision and mission to become a future leader and enterpreneur, make Indonesia Great Again !

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Indramin

Indra Aminudin is a students at the MBA ITB. Now working at PT. Huawei Tech Investment as Strategic Radio Planning, have a vision and mission to become a future leader and enterpreneur, make Indonesia Great Again !