Value investing is all about finding bargains. And one of the favorite ways that Ben Graham find bargains is using Price to Book value. What is Price to Book Value anyway? We are here to explain.
Book Value Explained
First, book value is an accounting term. It refers to all tangible assets minus all the liabilities. It is the money leftover when all the tangible assets are sold and given to shareholders upon liquidation. Ben Graham was particular to the tangible assets of the company. Only those that can be sold easily are the best margin of safety for him in times when the company is liquidating. Plants, land, equipment are examples of those. Brands, which are intangibles, will not win Ben Graham’s heart. Although his student Warren Buffett will use the intangibles years after to determine a business’ value.
So what then is Price to Book Value? Its just price over the book value per share.
P/BV = Price / Book value per share
Book value per share can be found in the company’s balance sheet. While the price is the price of the stock in the market. If P/BV is 1, it means book value is the same as the stock price. If P/BV is greater than 1, it means the public is pricing the stock higher than its assets. If the P/BV is lower than 1, it means that the stock may be undervalued.
And this is where Ben Graham focuses on. He focuses on companies that have low P/BV. For a margin of safety, he prefer’s if the Book Value is 1/3rd of the stock price (a P/BV of 0.33).
Here is a video to explain and where to find the data for computing Price to Book Value.