P/B ratio and P/E ratios are the two most used common terms in stock market. We always come across these two words when we read about the fundamental of a company. So in this blog we will talk about P/B ratio which is known as Book Value.
To understand the book value of a company you should first know about term TANGIBLE ASSET. Now what is a tangible asset.? Every item we can touch, feel and can see are known as tangible asset. Now lets take example to understand this term.
If you see the book value of India cements it is around Rs 170.57. What it means?
- It means for every share of India Cements there is a tangible asset of Rs 170.57.
- Suppose if theoretically India cements gets sold so then the shareholders will get Rs 170.57 per share.
- Like this amount is fixed. You can get more than that depending on the situation but Rs 170.57 is the amount you will get for sure
- This is just an example. This is just a value to get an idea of the company how much safe the company is !
Now the book value is a fundamental parameter which can be used for heavy industries. Now you may ask why? Lets take an example of IT company
The book value of Infosys ltd is Rs 146.12 and stock is trading over Rs 600 per share . Does that mean it is over valued? No. Lets take a example.
- you know apple stocks are like blue chips right? Now why? Why the stock is trading over 300 USD. If you see the book value of Apple Inc its very low. Still the Stock is trading over the charts.
- This is happening because of its brand value .
- Usually the Iphone costs around Rs 12000 maybe in making but is sold over Rs 1,00,000 per piece because of its brand value.
- It derives its value from its brand not the machinery, or the lands owned by the company,
- Same happens with Infosys also. They just have a office where many employees sit and work.
- In accounting terms, we don’t consider employees as tangible asset because they take salary from the company
- They are regarded as a Liabilities for the company.
But if you take a cement company, their value is derived from the machinery they own not the brand because usually they cost the same with the difference of Rs 1 or Rs 2 per bag of cement. So more the production they have that means they should have more machinery which means more tangible assets. It increases the book value of the company. So if you are evaluating a company which is in cement , steel , power in short – heavy industries then look for the book value of the company. P/B ratio is used to evaluate the company having a formula [ Price / Book value ].
Like India cements Price right now is Rs 113 to Rs 176 per share of its book value so the P/B ratio is around 0.66. which can be considered a good parameter to invest in But for investing into a company you should look for more fundamental parameters.