Equivalent Annual Costs
In the previous articles we have seen how we can convert a possible future stream of cash flows to its present value today to make investment decisions. We choose amongst competing projects and the one with the highest NPV is usually selected. But sometimes this may not be the appropriate thing to do. Example: Consider […]
Macro-Economic Factors and their Effect on Personal Finance
Personal finance is defined in such a way that it is supposed to be linked with the financial decisions of an individual or their family. Any decision which is taken at a higher level is not considered to be a part of the personal-finance domain. However, it is important to realize that decisions related to […]
Debt Schedule in Financial Modelling
The inability to manage debt is one of the biggest reasons behind the failure of many companies. Just in the past year, giants like Toys R Us and Sears had to file for bankruptcy because they were unable to manage their debt. Leverage is essential in today’s world since it allows a company to expand […]
How the GameStop Saga Proves That Shoe is on the Other Foot for the Investors
How the GameStop Saga is Small Investors Paying the Biggies in the Same Coin The past few weeks have seen Corporate America and the wider Investor community come to terms with the GameStop saga wherein hordes of individual investors banded together on social media platforms such as Reddit and wreaked havoc on many stocks through […]
Who Uses Accounting Data ?
Financial reporting is used by a wide variety of users for a wide variety of purposes. For this reason it has been difficult to set a common framework of accounting. The many stakeholders often have contrasting needs from accounting information. Let’s look at the stakeholders and their need for accounting data: Capital Markets: Accounting information […]
Price to Book Value = Current Market Price / Total Assets – Intangible Assets
The value of assets is taken from the most recently published balance sheet.
The price to book value ratio looks at an immediate liquidation scenario. Investors therefore compare the price that they are paying for the company against what they would receive if the business shut operations right away.
The price to book value ratio can be used to make some serious interpretations about the business of the company and how the market is reacting to it. Here are some of the common interpretations made on the basis of price to book value ratio:
The analyst must therefore look at a low price to book value ratio as a starting point to understand which of the two is the reality.
Investors who had an eye on the Price to Book Value ratio found that even if the company wound up its operations at its book value, they would still be left with more book value per share than the then prevailing market price per share. Such bets are usually risky because it is difficult to trust the book value stated on financials that have been admitted to be doctored with.
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