Price to book ratio explained
It is imperative that you know what the price to book ratio for a company is if you ever want to be anything more than a novice investor.
The book value of a company is simply how much they are worth at this time. It does not take into account a companies future or potential earnings, it how much assets they have minus the liabilities a company has.
The price to book ratio is the price per share divided by the book value per share. The price to book ratio for a company can be anywhere between 1-10+. Safer, “value” companies tend to stay around 1-3 and riskier higher growth companies tend to be above 3 in the price to book area.
It is very rare to find a company with a price to book ratio below 1. This would mean the company is trading below what it is intrinsically worth. Which hardly ever happens.
The price to book ratio for a company is easy to find on a financial website and it is pretty easy to calculate. It is a good barometer for what type value you will be getting by investing in the company. It is not the only thing you look at but it is definitely one of the main things you should be looking at.