Evaluate Stock by PB ratio

In previous article, we had discussed in PE ratio. In this chapter, we would like to discuss another important indication - PB ratio.

PB ratio stand for Price / Book value ratio. Book Value meaning the Net Asset Value for the stock.

In the financial report or some other sources, you can get the NAV for the share. The NAV is determine by Total Asset Value / Total share.

Eg.
Airasia
Total Asset Value is RM 2,676,586,000
Total Share Issued is 2,759,368,000
NAV or Book Value per share is RM 2,676,586,000 / 2,759,368,000 = RM 0.97 per share.
Current Price is RM 1.17
PB ratio is 1.2; meaning the market price is higher then the NAV for 20%

Please dun mistaken that PB ratio >1 meaning the share is over value. This is just one of the analysing factor. Because a lot of business does not own Asset but still valued. Especially for Nasdaq company (IT company). Normally for this kind of company they own Intellectual Properties (IP) which is not count as Asset in this case. So normally their PB ratio is very high.

So when you want to compare on PB ratio, you must compare with the same nature of business (as mention in PE Ratio Analyse).

PB ratio create a "Safe Impression". If the PB ratio is near to 1 or less then 1; then if anything happen, this company still can sell of its Asset and create that value to the share holder.

In most case, the Asset value is created by Product Stock of the company, building, machine, etc.
When you are using PB ratio as analysis, please also consider the nature of the business. If this business collapes, will the "Asset" decrease in value?

Note: PB ratio cannot be use as the only analyse index. Some NAV might over valued by the company to show it is more interesting.