For Immediate Release
Chicago, IL – November 20, 2018 - Stocks in this week’s article include: GMS Inc. GMS, PCM, Inc. PCMI, Echo Global Logistics, Inc. ECHO, Gulfport Energy Corp. GPOR and Barclays PLC BCS.
Screen of the Week of Zacks Investment Research:
Valuable Low Price-to-Book Stocks for Solid Profits
Value investors have preferred price-to-earnings ratio or P/E for time immemorial as a means to identify value stocks. However, in case of loss-making companies that have a negative price-to-earnings ratio, the price-to-sales or P/S ratio is considered in determining their true value.
However, the price-to-book ratio (P/B ratio), though used less often, is also an easy-to-use valuation tool for identifying low-priced stocks with great returns.
P/B is the ratio of stock price to book value
It is calculated as below:
P/B ratio = market capitalization/book value of equity
What is Book Value
There are several ways to determine book value. Book value is the total value that would be left, according to a company’s balance sheet, if it goes bankrupt. In other words, this is what shareholders would theoretically receive if a company liquidates all of its assets after paying off its liabilities.
It is calculated by subtracting total liabilities from total assets of a company. In most cases, this would equate to the common stockholders’ equity on the balance sheet. However, depending on the balance sheet, intangible assets should also be subtracted from total assets to determine the 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.
And that's what we're screening for today…
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/338202/7-valuable-low-pricetobook-stocks-for-solid-profits
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Echo Global Logistics, Inc. (ECHO) : Free Stock Analysis Report
Barclays PLC (BCS) : Free Stock Analysis Report
GMS Inc. (GMS) : Free Stock Analysis Report
PCM, Inc. (PCMI) : Free Stock Analysis Report
Gulfport Energy Corporation (GPOR) : Free Stock Analysis Report
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