{"id":10955,"date":"2022-11-11T14:27:29","date_gmt":"2022-11-11T08:57:29","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=10955"},"modified":"2022-11-11T14:27:30","modified_gmt":"2022-11-11T08:57:30","slug":"how-to-use-the-p-b-ratio-in-stock-picking","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/","title":{"rendered":"How To Use the P\/B Ratio in Stock Picking"},"content":{"rendered":"\n<p>Stock markets are an investment vehicle for significant wealth creation. However, it cannot be done overnight. It involves a process of considerable learning and following your time-tested principles consistently as selecting one stock out of a pool of them would be overwhelming. One of the ways that people use to find a good investment is by using various tools and methods. <a href=\"https:\/\/www.tickertape.in\/blog\/financial-ratios\/\">Financial ratios<\/a> are one of them. In this article, we will discuss a popular financial ratio &#8211; price to book ratio.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#What-is-fundamental-analysis\" title=\"What is fundamental analysis?\">What is fundamental analysis?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Price-to-book-value-ratio\" title=\"Price-to-book value ratio\">Price-to-book value ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Calculation-PB-ratio\" title=\"Calculation PB ratio&nbsp;\">Calculation PB ratio&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Interpretation-of-the-PB-ratio\" title=\"Interpretation of the P\/B ratio\u00a0\">Interpretation of the P\/B ratio\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Ideal-PB-ratio\" title=\"Ideal P\/B ratio \">Ideal P\/B ratio <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Where-is-it-useful\" title=\"Where is it useful?&nbsp;\">Where is it useful?&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Drawbacks-of-the-PB-ratio\" title=\"Drawbacks of the P\/B ratio\">Drawbacks of the P\/B ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-use-the-p-b-ratio-in-stock-picking\/#Important-pointers-to-be-kept-in-mind\" title=\"Important pointers to be kept in mind\">Important pointers to be kept in mind<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-is-fundamental-analysis\"><\/span><strong>What is fundamental analysis?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/a-step-by-step-guide-to-fundamental-analysis\/\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/blog\/a-step-by-step-guide-to-fundamental-analysis\/\">Fundamental analysis<\/a> involves investing in stock after understanding the nitty-gritty of the business in greater detail by using various tools and methods. Financial ratios are one of the most used tools to compare the company with itself (current vs historical) or with its peers.<\/p>\n\n\n\n<p>Some popular ratios are price-to-earnings, debt-to-equity, <a href=\"https:\/\/www.tickertape.in\/blog\/return-on-equity-ratio\/\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/blog\/return-on-equity-ratio\/\">return on equity<\/a>, current ratio, etc. The usage of any particular ratio depends on the sector, industry, and company that you are analysing. <strong>One of the ratios that we would be discussing here is the price-to-book ratio.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Price-to-book-value-ratio\"><\/span><strong>Price-to-book value ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Price to book value or the P\/B ratio is used to compare a company\u2019s <a href=\"https:\/\/www.tickertape.in\/blog\/market-capitalization\/\">market capitalisation<\/a> to its book value. It can be calculated by dividing the price per share by the <a href=\"https:\/\/www.tickertape.in\/blog\/book-value-per-share\/\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/blog\/book-value-per-share\/\">book value per share (BVPS)<\/a>. It is the assets of the company less its liabilities per share or total shareholder\u2019s <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> per share. It shows the value of the company that remains after the assets are liquidated and all debts are paid.<\/p>\n\n\n\n<p>The price per share denotes the price that market participants are willing to pay based on forward-looking metrics which reflect the company\u2019s future cash flow. While the <a href=\"https:\/\/www.tickertape.in\/blog\/book-value-per-share\/\">BVPS<\/a> is an accounting measure, which reflects the historic cost principle.<\/p>\n\n\n\n<p><strong>PB = Price per share \/ BVPS<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Calculation-PB-ratio\"><\/span><strong>Calculation PB ratio&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Let\u2019s take an example of ABC Bank to understand the calculation:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Particulars&nbsp;<\/strong><\/td><td><strong>Figures (as on 31\/3\/2022)<\/strong><\/td><\/tr><tr><td>Price per share&nbsp;<\/td><td>Rs. 100<\/td><\/tr><tr><td>Total equity (Book value)&nbsp;<\/td><td>Rs. 600 cr.<\/td><\/tr><tr><td>Total outstanding shares&nbsp;<\/td><td>20 cr.<\/td><\/tr><tr><td>BVPS*&nbsp;<\/td><td>Rs. 30<\/td><\/tr><tr><td>P\/B^&nbsp;<\/td><td>3.33<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>*BVPS= Total equity \/ Total outstanding share = Rs. 600 cr. \/ 20 cr. = Rs. 30<\/p>\n\n\n\n<p>^P\u2044B = Price per share \/ BVPS = Rs.100 \/ Rs. 30 = 3.33<\/p>\n\n\n\n<p>The above calculation will help you understand the formula lot better, but you don\u2019t need to calculate the ratio every time you research a new company. You can find the P\/B ratio by searching individual companies through Tickertape from the \u201cKey metrics\u201d sub-section under the \u201c<a href=\"https:\/\/ttape.in\/QrdjUguMAub\" rel=\"nofollow noopener\" target=\"_blank\">Overview tab<\/a>\u201d<strong>. <\/strong>Tickertape helps you source the data, information and content for Indian stocks, <a href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/\">mutual funds<\/a>, ETFs and indices.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"605\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.14-PM-1024x605.png\" alt=\"\" class=\"wp-image-10964\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.14-PM-1024x605.png 1024w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.14-PM-300x177.png 300w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.14-PM-1536x907.png 1536w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p><em>Figure 1: Overview section of HDFC Bank in Tickertape<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Interpretation-of-the-PB-ratio\"><\/span><strong>Interpretation of the P\/B ratio\u00a0<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>It is important to understand the interpretation of the P\/B ratio. The calculated P\/B ratio of ABC Bank was 3.33,&nbsp; which means that for Rs. 1 of the net asset of ABC Bank, the investors are willing to pay Rs. 3.33. The ratio is also used to know if the company is undervalued, overvalued, or fairly valued. It is used in conjunction with other metrics to know if the valuation is justified.&nbsp;&nbsp;<\/p>\n\n\n\n<p>You have to compare the P\/B ratio of companies within the same sector\/industry. You can either compare the ratio with individual peers or with the sector average. The stock with a lower ratio would be considered undervalued in both comparisons.&nbsp;&nbsp;<\/p>\n\n\n\n<p>For e.g., Let\u2019s analyse <a href=\"https:\/\/www.tickertape.in\/stocks\/hdfc-bank-HDBK?checklist=pro&amp;ref=screener-table_int-asset-widget&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/stocks\/hdfc-bank-HDBK?checklist=pro&amp;ref=screener-table_int-asset-widget&amp;utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" rel=\"noreferrer noopener\">HDFC Bank<\/a> with the help of Tickertape. Fig 2 shows a comparison through the \u201cPeers tab\u201d under an individual company page (compare with three close competitors) and Fig 3 shows the \u201cStock Screener\u201d tool\u00a0 (compare with all listed competitors) used for comparison. You can also apply an additional filter on the \u201cStock\u00a0 Screener\u201d tool to customise your comparison based on other metrics.\u00a0<\/p>\n\n\n\n<p><em>Figure 2: Peers section of HDFC Bank in Tickertape<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"578\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.28-PM-1024x578.png\" alt=\"\" class=\"wp-image-10966\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.28-PM-1024x578.png 1024w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.28-PM-300x169.png 300w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-1.46.28-PM-1536x866.png 1536w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p><em>Figure 3: Tickertape\u2019s <a href=\"https:\/\/www.tickertape.in\/blog\/tickertape-stock-screener-to-discover-largecap-stocks\/\">Stock Screener<\/a><\/em><\/p>\n\n\n\n<p>We have filtered using the Private Bank subsector and market capitalisation to make our comparison meaningful. A&nbsp; quick glance will tell you that HDFC Bank is the largest private-sector bank based on market capitalisation and still has a P\/B lower than the next biggest private-sector banks.&nbsp;<\/p>\n\n\n\n<p>Another way to look is to compare the current P\/B ratio of a particular company with its own historical levels\/averages. If the P\/B ratio has a history of mean reversion, the same can be used to know the current valuation. The same comparison can be done for a sector or industry to know if they are undervalued,\u00a0 overvalued, or fairly valued.\u00a0\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"667\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-2.16.57-PM-1024x667.png\" alt=\"\" class=\"wp-image-10975\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-2.16.57-PM-1024x667.png 1024w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-2.16.57-PM-300x196.png 300w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/Screenshot-2022-11-11-at-2.16.57-PM-1536x1001.png 1536w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Ideal-PB-ratio\"><\/span><strong>Ideal P\/B ratio <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>It is not advisable to compare companies of different sectors based on the P\/B ratio as the ideal P\/B ratio would be different for different sectors.&nbsp;<\/p>\n\n\n\n<p>Conventionally, any value less than 1 indicates that the stock is undervalued as it shows that the accounting value of an asset if sold, will fetch more than the current market price. However, a P\/B ratio of less than 3 is also preferred by value investors.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Where-is-it-useful\"><\/span><strong>Where is it useful?&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The P\/B ratio is most useful when your book value is a good representative of the <a href=\"https:\/\/www.tickertape.in\/blog\/market-value\/\">market value<\/a> of the assets and also in capital-intensive business e.g., banking sector, financial services, etc.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Drawbacks-of-the-PB-ratio\"><\/span><strong>Drawbacks of the P\/B ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The P\/B ratio may not be useful for every sector. A sector like Information Technology has high human capital\u00a0 (employees) or brand value, crucial for a company\u2019s success. The ratio may not be useful as such value is not captured in the company\u2019s assets.<\/p>\n\n\n\n<p>A company with a high depreciating asset would not get a value that is mentioned as Book value, so caution should be administered.&nbsp;&nbsp;<\/p>\n\n\n\n<p>A low P\/B ratio might also indicate that the company is in financial distress with losses, high NPAs, or a lower capital adequacy ratio. Using the P\/B ratio in conjunction with other metrics would be more useful.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Important-pointers-to-be-kept-in-mind\"><\/span><strong>Important pointers to be kept in mind<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Along with analysing the P\/B ratio, one should shortlist companies with high cash flow generation capacity, low D\/E ratio and future growth. The companies shortlisted based on the P\/B ratio should be further analysed to remove any companies with high debt, consistent loss-making, or poor growth visibility.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the ways of evaluating a stock is by using financial ratios. In this article, Arvind Kothari discusses how to use the PB ratio in stock analysis.<\/p>\n","protected":false},"author":59,"featured_media":10977,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[1770],"tags":[],"acf":[],"modified_by":"Anshiya Tabassum","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/04-Nov-2022-How-To-Use-the-P-B-Ratio-in-Picking-Stocks-Guest.jpg?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10955"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=10955"}],"version-history":[{"count":7,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10955\/revisions"}],"predecessor-version":[{"id":10976,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10955\/revisions\/10976"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/10977"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=10955"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=10955"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=10955"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}