For Immediate Release
Chicago, IL – January 23, 2019– Stocks in this week’s article include Mallinckrodt Public Limited Co. MNK, Dell Technologies Inc. DELL, American Axle & Manufacturing Holdings, Inc. AXL, Magna International Inc. MGA and General Motors Co. GM. Kevin Matras screens for companies showing their 'first' profit and explains why they are ones to watch.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
Promising Price-to-Book Value Stocks with Solid Prospects
Among valuation metrics, price-to-earnings (P/E) and price-to-sales (P/S) are more commonly used for stock selection. This is because calculations based on earnings and to some extent sales are easy and come in handy. However, the price-to-book ratio (P/B ratio) has emerged as a convenient tool for identifying low-priced stocks with high-growth prospects.
The P/B ratio is used to calculate how much an investor needs to pay for each dollar of book value of a stock. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
P/B ratio = market capitalization/book value of equity
What is Book Value?
There are several ways by which book value can be defined. 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 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 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 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.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/348758/6-promising-pricetobook-value-stocks-with-solid-prospects
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