P/B Ratio

[halsey123]

I was wondering how much faith you guys put into the P/B Ratio when looking for value. Is the book value figured using a standardized way, or do companies use different methods?

I usually start with P/B ratio when looking for cheap buys, but someone told me that P/B ratio is useless because book value can be manipulated so easily. Whatcha think?

 

[thetank]

look at PB when company has mostly liquid assets, ie banks.

otherwise book value open to all sorts of accounting manipulations (the legal kind)

 

[volkovv]

It all depends on the industry/company you are looking into. For companies that mostly have liquid assets on their balance sheets, like banking and insurance, P/B multiple is appropriate to use. For high growth companies, like Google it may be of little value.

If you are interested in this topic, read about Fama and French Three Factor Model, they used B/P as one of their factors and found it to be quite significant.



Edited 1 time(s). Last edit at Monday, July 23, 2007 at 10:46PM by volkovv.

 

[itstoohot]

P/E rules, period.

 

[mwvt9]

Note that Fama/French found B/P to be a proxy for a distress factor. They don't believe it is the actual factor, but whatever the factor is, B/P does a decent job at capturing it.

They explain it as a cost of capital issue.

There is quite a bit of free stuff on the three factor model. Just google it.

 

[halsey123]

Thank you everyone for your responses...

Using P/B for companies with mostly liquid assets makes sense.

I will have to research the Fama/French three factor model. I am just getting into financial modeling and having to start from square one. I haven't had any formal finance education yet. That comes later in my junior year I guess. Believe it or not, my local library doesn't even have any books on basic finance. However, I did check out "Reading Financial Statements for Dummies". It's helping to bring some things together...