Precious Metals & Energy industry stock prices as of 3/5/2021 are higher than the average stock price since the start of Q42020. Further, price-to-book values for many firms within the industry are trading under 3x, some as high as 40x. The P/B ratio compares a company’s market stock price to its book value. The market value of a company is its share price multiplied by the number of shares outstanding. The book value is the net assets of the company. A lower P/B ratio could mean stocks are undervalued. However, it could also mean something is fundamentally wrong with the company. The P/B ratio also indicates whether you’re paying too much for what would remain if the company went bankrupt immediately. The P/B ratio has been favored by value investors for decades and is widely used by market analysts. Traditionally any value under 1 is considered a good P/B for value investors, indicating a potentially undervalued stock. However, value investors may often consider stocks with a P/B value under 3 as their benchmark.  What counts as a “good” price-to-book ratio will depend on the industry in question and the overall state of valuations in the market. For example, between 2010 and 2020 there was a steady rise in the average price-to-book ratio of the technology companies listed on the Nasdaq stock exchange, roughly tripling during that period. An investor assessing the price-to-book ratio of one of these technology companies might therefore choose to accept a higher average price-to-book ratio, as compared to an investor looking at a company in a more traditional industry in which lower price-to-book ratios are the norm.


Example:
Assume that a company has $100 million in assets on the balance sheet and $75 million in liabilities. The book value of that company would be calculated simply as $25 million ($100M - $75M). If there are 10 million shares outstanding, each share would represent $2.50 of book value. If the share price is $5, then the P/B ratio would be 2x (5 / 2.50). This illustrates that the market price is valued at twice its book value.

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Credit:
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Disclaimer: Information contained in this report are only opinions and only provided for research purposes and not investment advice.

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Ratios can be invaluable tools for making decisions about companies you might want to invest in. Across the industry, they are used by individual investors and professional analysts, and there are a variety of ratios to use. Financial ratios are typically cast into four categories.

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Great research article posted on Analytics Vidhya on correlating stock price performance and financial ratios. With our unique data set, you can begin integrating this research and more into your long and short term trading strategies. We are here to help as much or as little as you need.

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