The Basics of the P/B Ratio

The P/B ratio compares a company's market capitalization, or market value, to its book value.
Specifically, it compares the company's stock price to its book value per share (BVPS). The
market capitalization (company's value) is its share price multiplied by the number of
outstanding shares. The book value is the total assets - total liabilities and can be found in a
company's balance sheet. In other words, if a company liquidated all of its assets and paid off
all its debt, the value remaining would be the company's book value.

It's helpful to identify some general parameters or a range for P/B value, and then consider
various other factors and valuation measures that more accurately interpret the P/B ratio and
forecast a company's potential for growth.

Calculating P/B Ratio

As stated earlier, the P/B ratio examines a company's stock price to its BVPS. The ratio is
calculated as follows:

P/B Ratio = Market Price per Share ÷ Book Value per Share (BVPS)

where:

 BVPS = (Total Shareholder Equity - Preferred Equity) ÷ Total Outstanding Shares

Using P/B Ratio to Evaluate Stock

The P/B ratio should not be used as a single evaluation of a stock because, while a low P/B
may mean an undervalued company, it can also be a result of serious underlying problems
within that company. A weakness in a P/B Ratio evaluation is that it fails to factor in things such
as future earning prospects or intangible assets. However, the P/B ratio helps to identify hyped-
up companies that have surging stock prices with no assets.

Other potential problems in using the P/B ratio stem from the fact that any number of things,
such as recent acquisitions, recent write-offs, or share buybacks, can distort the book value
figure in the equation. In searching for undervalued stocks, investors should consider multiple
valuation measures to complement the P/B ratio.

One measure commonly used is return on equity (ROE) which indicates how much profit a
company generates from shareholders' equity. P/B ratio and ROE usually correlate well, and
any large discrepancy between them may indicate a cause for concern.

Net Operating Income (NOI) vs. Earnings Before Interest

and Taxes (EBIT): An Overview
Net operating income (NOI) determines an entity's or property's revenue less all
necessary operating expenses. It doesn't take interest, taxes, capital expenditures,
depreciation, or amortization expenses into account. Conversely, earnings before interest and
taxes (EBIT) consists of revenues minus expenses, excluding taxes and interest, but
it does take depreciation and amortization expenses into account. EBIT is a profitability
measure for a company.