What is price to book value or the P/BV ratio?
P/BV is simply the market price per share divided by the book value of equity per share. The market price is straightforward but the concept of book value of equity requires further explanation. It is based on the balance sheet of a company and is the difference between its assets (what it owns) and liabilities (what it owes). • Spot a good stock. Win big! Another way of thinking about the book value of equity is that it is the firm’s proceeds when it first issued equity plus earnings since then (minus losses) and minus the dividends paid out over its life. P/BV = (Equity + Earnings Losses) Dividend. Why is P/BV a good measure of value? Traditionally stocks with a P/BV significantly less than 1 are considered good buys. The argument is that balance sheets are sometimes a better measure of a company’s value than market prices which are often volatile and guided by sentiment. Therefore firms which trade below their book value will sometimes be good firms which are being undervalued by fi
