What is PB ratio example & uses
Introduction
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In our complete stock market learning program, there are many ratios to see whether we are getting a company at a cheap price or a high price, but according to us, Price to Book Ratio i.e. PB Ratio is one of the best ratios for this. In this blog, we will see what PB ratio is, how it is calculated and how we can use it and along with that we will tell you about a sector in which you can make very good investments on the basis of PB ratio. All of you are requested to keep watching the blog till the end because if you understand this one ratio, then you can make very good investments.
what is PB ratio
Friends, Price to Book Ratio i.e. PB Ratio is a valuation ratio which tells us how much money investors are paying today for the book value of ₹ 1 of a company. For example, if the PB ratio of a company is two, it means that investors are paying ₹ today for the net worth of ₹ 1 of this company.
How to calculate PB ratio
Friends, the formula to calculate the price to book ratio is PB ratio is equal to current share price divided by book value per share. Here, we all understand the meaning of current share price, which is the current share price of the company. Let us understand book value per share better. Friends, every company has assets and liabilities i.e. debt. When we pay all the liabilities of the company, then what remains with the company is called the book value of the company. For example, if AB Limited Company has total assets of Rs 100 crore and liabilities of Rs 0 crore. If AB Limited Company has 50 lakh shares then the book value of the company will be Book value is equal to total assets minus total liabilities i.e. 00 crores minus 0 crores which will be 0 crores, and we will say that the book value of AB Limited Company is 0 crores. Friends, book value has three more names.
Read more What is BTST and STBT in trading
It is also called shareholder equity, net asset value or net worth. So, if you see these three words anywhere, then you have to understand it as the book value of the company. Now friends, let us assume that AB Limited Company has a total of 50 lakh shares. So, to find out the book value per share, we will divide its book value by its total number of shares. In this way, the book value per share of AB Limited Company will become 0 crores divided by total number of shares. 50 lakhs i.e. ₹ 660 per share. Let us now calculate the book value of AB Limited Company. Let us calculate the price to book ratio for AB Limited. Let us assume that the current share price of AB Limited is ₹ 10, then its price to book ratio will be Price to book ratio is equal to current share price divided by book value per share which will be 150 / 60 i.e. 2.5. In this way, we will say that the price to book ratio of AB Limited Company is 2.5 and this will mean that today investors are paying ₹ for the book value of ₹ 1 of AB Limited Company. So, we have understood how to calculate the PB ratio.
how to use PB ratio?
Let us now understand its use friends, as we told earlier, PB ratio is a valuation ratio and most of the companies' PB ratio runs in a cycle, that is, it keeps increasing and decreasing between a low range to a high range and when a company's PB ratio is around its low range, then the company is considered undervalued i.e. cheap and when the company's PB ratio is around its high range, then the company is considered overvalued i.e. expensive. Friends, to understand this more easily, the company's median value is seen from the history of its PV ratio.
Here the red dotted line you are seeing indicates the median value and when the company's PB ratio becomes less than its median value, then it is considered undervalued and when the company's PB ratio becomes more than its median value, then it is considered overvalued and All we have to do to make profit in the stock market is to buy stocks of good companies when their PB ratio is much lower than their 3-year median PB ratio and then sell them when their PB ratio is higher than the 3-year median PB ratio
where to use PB ratio
And now we understand where we can use PB ratio and where we cannot.
First of all, we cannot use PB ratio in IT and technology companies because these companies have very few assets, due to which their book value is very low. We can best use PB ratio in sectors where companies have a lot of assets, such as manufacturing, utility, banking and finance and mining sectors. These companies have a lot of assets in the form of property, plant, equipment or cash, due to which the book value of these companies is very high, and we can use PB ratio in the valuation of these companies.
example
If we talk about steel companies in the mining sector, then we can easily invest in it on the basis of PB ratio. The PB ratio of most steel companies moves in the range of 0.5 to 2.5 i.e. when the PB ratio of a steel company comes around 0.5, it means that the steel company has become quite undervalued and in such a situation we can get a good opportunity to invest in steel companies and when their PB ratio comes around 2.5, it means that the steel company has become quite overvalued and at this time we can make profit by selling our steel stocks bought at cheap PB ratio. Friends, you can see the valuation of any company on the basis of PB ratio from the Screener website.
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