price-to-book ratio

(noun)

Or market-to-book ratio, this ratio compares the market valuation of an organization to the book value of the organization.

Related Terms

Examples of price-to-book ratio in the following topics:

  • Market/Book Ratio

    • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
    • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
    • It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio.
    • When intangible assets and goodwill are excluded, the ratio is often specified to be "price to tangible book value" or "price to tangible book".
    • Calculate the different types of price to book ratios for a company

  • Pricing a Security

    • Therefore, money you get in the future needs to be reduced to approximate the opportunity cost.
    • From the prices, one calculates price multiples such as the price-to-earnings or price-to-book value ratios.
    • Next, one or more price multiples are used to value the firm.
    • For example, the average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value.
    • Investors use valuation methods to estimate what a company is worth, but the price of a stock on the market usually does not rest at the book-value of the company.

  • The Weightings

    • The weightings used in the WACC are ratios of the market values of various forms of debt and equity used in a company's financing.
    • It is a distinct concept from market price, which is the price at which one can transact.
    • For market price to equal market value, the market must be efficient and rational.
    • Special value refers to a synergy that may exist between two parties that makes the fair price of a transaction higher.
    • Book value refers to the value of an asset according to the account balance present on the balance sheet of a company.

  • Selected Financial Ratios and Analyses

    • A company's financial ratios can also be compared to those of their competitors to determine how the company is performing in relation to the rest of the industry.
    • Changes in financial ratios can impact a public company's stock price, depending on the effect the change has on the business.
    • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
    • The following are some examples of financial ratios that are used to analyze a company.
    • The current ratio is used to determine a company's liquidity, or its ability to meet its short term obligations.

  • Price/Earnings Ratio

    • Price to earnings ratio (market price per share / annual earnings per share) is used as a guide to the relative values of companies.
    • In stock trading, the price-to-earnings ratio of a share (also called its P/E, or simply "multiple") is the market price of that share divided by the annual earnings per share (EPS).
    • The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings that would be required to pay back the purchase price, ignoring inflation, earnings growth, and the time value of money.
    • P/E ratio = Market price per share / Annual earnings per share
    • The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings).

  • Ratio Analysis and EPS

    • Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization.
    • Financial analysts use financial ratios to compare the strengths and weaknesses in various companies.
    • If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
    • Financial ratios are categorized according to the financial aspect of the business which the ratio measures .
    • Activity ratios measure how quickly a firm converts non-cash assets to cash assets.

  • Classification

    • Ratio analysis is one of three methods an investor can use to gain that understanding.
    • Ratio analysis is a foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
    • There are various types of financial ratios, grouped by their relevance to different aspects of a company's business as well as to their interest to different audiences.
    • Debt, or leverage, ratios measure the firm's ability to repay long-term debt.
    • Financial ratio analysis allows an observer to put the data provided by a company in context.

  • Defining Dividends

    • Dividends are a portion of company earnings regularly paid to shareholders, paid as some fixed amount per share price.
    • Dividend yield refers the ratio between dividends per share and the market price of each share, and it is expressed in terms of percentage.
    • It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid.
    • The company does not take any explicit action to adjust its stock price; in an efficient market, buyers and sellers will automatically price this in.
    • Book closure date is when company will ideally temporarily close its books for fresh transfers of stock.

  • Quick Ratio (Acid-Test Ratio)

    • The Acid Test or Quick Ratio measures the ability of a company to use its assets to retire its current liabilities immediately.
    • In finance, the Acid-test (also known as quick ratio or liquid ratio) measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.
    • Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.
    • Acid test often refers to Cash ratio instead of Quick ratio: Acid Test Ratio = (Current assets - Inventory) / Current liabilities.
    • The higher the ratio, the greater the company's liquidity will be (better able to meet current obligations using liquid assets).

  • Setting the Target Payout Ratio

    • Companies determine what kind of investors they want to attract and the investment opportunities they face before setting the target payout ratio.
    • The Target Payout Ratio, or Dividend Payout Ratio, is the fraction of net income a firm pays to its stockholders in dividends.
    • However investors seeking capital growth may prefer lower payout ratios.
    • This is appealing to some investors because a lower dividend implies that more earnings are being reinvested in the company, which should cause the stock price to rise.
    • The Target Payout Ratio depends on what investors the management of a company are trying to attract, and what current investors' expectations are.