Price to Book Ratio Calculation
Value investors search for companies that have been overlooked by the market. This means that they are not in the general attention of the other investors, but still provide opportunities for high returns.
The key to the success of value investors is that they manage to find companies that are in their beginning of development and nobody else has yet noticed them. Value investors make a long-term investment in the company and patiently wait until the company develops to its full potential. This is the time when the other analysts also notice the potential of the company and the big bidding begins. As a result of his/her perspicacity the value investor collects his/her fat profits.
When deciding on a particular company, value investors look at such indicators as earnings growth, price to book ratio (P/B) and several others.
P/B represents the value that market has set on the book value of the company of interest. The following formula is used for the calculations of Price to Book ratio:
P/B = Share Price / Book Value per Share
The share price you take in the numerator is the current price per share of the company's stock.
How we interpret the results? The lower the P/B is, the better the value. This means that value investors look for companies, which have low P/B indicators.
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