While price-to-earnings and price-to-sales are the first to cross one’s mind while using valuation metrics, the price-to-book ratio (P/B ratio) is also a convenient valuation metric.
The P/B ratio measures how much an investor needs to pay for each dollar of the book value of a stock. It determines whether a company's asset value is comparable to the stock’s market price or not and hence can be useful for finding value stocks
It is calculated as below:
P/B ratio = market capitalization/book value of equity.
The P/B ratio helps to identify low-priced stocks that have high growth prospects. Celestica CLS, HF Sinclair Corporation DINO, Unum Group UNM, G-III Apparel Group. GIII and Sterling Infrastructure STRL are some such stocks.
Now let us understand the concept of book value.
What’s Book Value?
Book value is the total value that would be left over, according to the company’s balance sheet, if it goes bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidates all its assets after paying off all its liabilities.
It is calculated by subtracting total liabilities from the total assets of a company. In most cases, this equates to the common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from the total assets to determine book value.
Understanding P/B Ratio
By comparing the book value of equity to its market price, we get an idea of whether a company is under-or overpriced. However, like P/E or P/S ratio, it is always better to compare P/B ratios within industries.
A P/B ratio of less than one means that the stock is trading at less than its book value, or the stock is undervalued and, therefore a good buy. Conversely, a stock with a ratio greater than one can be interpreted as being overvalued or relatively expensive.
For example, a stock with a P/B ratio of 2 means that we pay $2 for every $1 of book value. Thus, the higher the P/B, the more expensive the stock.
But there is a caveat. A P/B ratio of less than one can also mean that the company is earning weak or even negative returns on its assets or that the assets are overstated, in which case the stock should be shunned because it may be destroying shareholder value. Conversely, the stock’s price may be significantly high — thereby pushing the P/B ratio to more than one — in the likely case that it has become a takeover target, a good enough reason to own the stock.
Moreover, the P/B ratio isn't without limitations. It is useful for businesses — like finance, investments, insurance, and banking or manufacturing companies — with many liquid/tangible assets on the books. However, it can be misleading for firms with significant R&D expenditure, high debt, service companies, or those with negative earnings.
In any case, the ratio is not particularly relevant as a standalone number. One should analyze other ratios like P/E, P/S, and debt to equity before arriving at a reasonable investment decision.
Price to Book (common Equity) less than X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.
Price to Sales less than X-Industry Median: The P/S ratio determines how much the market values every dollar of the company’s sales/revenues — a lower ratio than the industry makes the stock attractive.
Price to Earnings using F(1) estimate less than X-Industry Median: The P/E ratio (F1) values a company based on its current share price relative to its estimated earnings per share — a lower ratio than the industry is considered better.
PEG less than 1: PEG links the P/E ratio to the future growth rate of the company. The PEG ratio portrays a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued and investors need to pay less for a stock that has bright earnings growth prospects.
Current Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.
Average 20-Day Volume greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Value Score equal to A or B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best opportunities in the value investing space.
Here are our five picks out of the 9 stocks that qualified the screening:
Celestica is one of the largest electronics manufacturing services companies in the world, serving the computer and communications sectors.
Celestica has a Zacks Rank #1 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celestica has a projected 3–5 year EPS growth rate of 18.81%.
HF Sinclair is an energy company, which produces and markets light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products.
HF Sinclairhas a projected 3–5-year EPS growth rate of 13.34%. HF Sinclaircurrently has a Zacks Rank #1 and a Value Score of A.
Unum Group was created following the June 1999 merger of Provident Companies, Inc. and Unum Corporation. Along with disability insurance, the company provides long-term care insurance, life insurance, employer- and employee-paid group benefits and related services.
Unum Group has a Zacks Rank #2 and a Value Score of A. Unum Group has a projected 3–5 year EPS growth rate of 12.24%.
G-III Apparel Group is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. The company’s portfolio includes outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage.
G-III Apparel Group has a projected 3-5-year EPS growth rate of 15.0%. GIII currently has a Zacks Rank #2 and a Value Score of A.
Sterling Infrastructure operates through subsidiaries within segments specializing in E-Infrastructure, Building and Transportation Solutions. E-Infrastructure Solutions projects develop advanced, large-scale site development systems and services for data centers, e-commerce distribution centers, warehousing, transportation, energy and more. Building Solutions projects include residential and commercial concrete foundations for single-family and multi-family homes, parking structures, elevated slabs and other concrete work. Transportation Solutions includes infrastructure and rehabilitation projects for highways, roads, bridges, airports, ports, light rail, water, wastewater and storm drainage systems.
Sterling Infrastructure has a projected 3-5-year EPS growth rate of 18.0%. Sterling Infrastructure currently has a Zacks Rank #2 and a Value Score of A.
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