Simple Valuation Methods

Price-to-Books Ratio

Similar to price-to-earnings ratios, price-to-book ratios give you an idea of how much you are paying for a stock compared with the underlying performance of the company.

Price-to-book ratios are different, however, because they focus primarily upon the value of the assets and liabilities of the company. P/B ratios tend to also vary from one sector to another.

P/B ratios are calculated in 2 steps. First, you need to subtract the liabilities of the company from the assets. Second, you need to divide this number by the market capitalization of the company.

A low P/B ratio (under 1) can suggest that a company is undervalued, but it can also mean that a company is in trouble. Commonly, investors will look for companies with a P/B ratio of less than 3.

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