- Price/book value
- Shortcomings of price/book
Price/book is simply:
share price ÷ NAV
This simply measures the value of a company against the book value of its assets (as shown on its balance sheet). Because the value of assets shown in the accounts does not necessarily reflect either the market value of its assets, or their value to the company (which depends on what effect they have on future cash flows), this ratio is not widely used.
Asset values shown in the balance sheet are based on the purchase prices of the assets and the principal of accruing the costs to the profits they generate.
Price/book value is most often useful with sectors in which the value of a company depends largely on what assets it owns and those assets are accurately recorded in the accounts. In practice this means:
- investment trusts (which have no business other than holding assets)
- property companies (whose value is dominated by their assets and who are also required to revalue their main assets).