What is Price-to-Book Value Ratio (P/BV)?
Price to Book Value Ratio is one of the broadly used ratios to discover price relative to the value.
The P/BV measures a company's current market price (CMP) vis a vis its book value.
Book value is calculated by dividing net-worth by the number of outstanding shares.
In the book of the company, the book value is the accounting values per shares.It corresponds to the net-worth (capital plus reserves) per share.
A significant limitation of this number is that most assets on the books of the company are revealed at their historical cost less depreciation and not their realizable/liquidation value.
On the other hand, in a company which has been building reserves from sustained profitability, the book value is avital indicator of value.
In view of the fact that the book value considers the net-worth of a company, it is an important number in fundamental analysis.
For instance, let us calculate P/BV of a company with following information:
Equity Capital: Rs. 10 Lakhs
Reserves & Surplus: Rs. 50 Lakhs
Number of shares outstanding: 6 lakhs
Current Market Price: Rs. 20
Subsequently, BV would be:
Net-worth/ Number of shares outstanding = (Rs. 10 Lakhs + Rs. 50 Lakhs)/ 6 Lakhs = Rs. 10
And, P/ BV would be:
P/BV = CMP/BV = 20/10 = 2x
Consequently P/ BV ratio of this company would be 2 times.
P/BV less than 1 indicates the company is trading below its book value, and for this reason the stock is deemed to be undervalued.
On the other hand, it is applicable to ask, ‘why is the market pricing the share at a price less than BV?’ there may be several reasons for a stock being available for less than its book value including the poor investments made by the firm in the past which need to be written down then.
Therefore, all the companies with P/BV less than 1 may not be value buys. Investors should not depend on PBV for their investment decisions and should understand that not all stocks that trade at a discount on their book values are bargains (undervalued).
PBV is a valuable measure to value stocks where the earnings are negative and the more widely used PE ratio is not applicable.
It facilitatesevaluation across companies in an industry where book-keeping standards are dependable.
It is anexcellentcompute to value stocks of companies, such as in the banking industry.
On the other hand, for sectors such as the service industry where assets are limited, this valuation method may not be relevant.
Differential Voting Rights (DVR)
A DVR is similar to a share of a company, except for that it carries less than 1 voting right per share unlike a common share.
The issuers who wish to raise capital without diluting voting rights by making use of this instrument.
Investors who wish to invest only for dividends and capital appreciation and are not really bothered about voting rights find these shares attractive.
The number of voting rights for a DVR differs from company to company. DVRs typically trade as a separate category of instrument and are available at a discount to the common shares of a company.
The Companies Act, 2013 defines the eligibility of a company to issue such shares. This includes a dividend of at least 10% over the former 3 years and such shares shall not exceed 25% of the total post-issue paid up capital of the company.