Price-To-Book Value (PBV)

The PBV is obtained by dividing the share price of a company by its net asset value per share. The same result is, of course, obtained by dividing the company's market capitalisation by its net assets.

The difficulty with PBV as a meaningful investment criterion is defining the word 'value'. Copyrights, patents and brand names, for example, can be worth little or nothing, or many times their cost or book value. No fair value can really be established unless a competitive auction tests the market. Any valuation made by the board is essentially arbitrary and subjective.

A further problem is that companies treat intangible assets in different ways. Some revalue them in their balance sheets, others write them off completely or in part, immediately or over a period. Comparisons are therefore difficult to make and stark figures can be misleading.

Other more tangible assets such as plant and machinery, factories, office buildings, hotels and the like, can also have dubious value. For example, specialised machines that may soon become obsolescent, and factories in the middle of nowhere, are impossible to value accurately. Valuations of assets like these tend to be subjective and book values are often far removed from the underlying true worth.

Benjamin Graham, the dean of value investing, makes the general point that it is unwise to buy a share at a price above its book value. Conscious of the difficulty of valuing most fixed assets, he preferred to buy at two-thirds of current net asset value, taking no account of assets like factories and machinery and after deducting all debt. However, in his time, Graham was
spoilt for choice and few such extreme bargains exist today.

In general terms, PBV is a primitive investment measure that can at times provide a small degree of comfort to shareholders in a company. If the book value is well in excess of theshare price (a low PBV) it can also point to the possibility of a takeover; however, quality of the assets is all-important.

Jim O'Shaughnessy, in his book What Works On Wall Street, reviewed 40 years of data from the Standard & Poors COMPUSTAT database - 1954-1994. He found that stocks with a low PBV gave an above average annual return of 14.38% against the market average of 12.45%. Conversely, stocks with a high PBV gave a poor return of only 7.47%.