标题: Price to book is lower better? [打印本页] 作者: ba736 时间: 2011-7-11 19:24 标题: Price to book is lower better?
Why is a lower P/v better than a higher P/V as compared with another co?作者: mengxu 时间: 2011-7-11 19:24
if a stock is trading close to book, there is hopefully a lot of appreciation to come so long as there wasent a prior catalyst to cause it to trade at a lower multiple作者: benbenxiong 时间: 2011-7-11 19:24
Stock A sells for $10 and its BV is $15. You are paying $10 for a company that could be liquidated from an accounting point of view for $15. Of course the company might have lots of debt and large litigation cases that might actually be worth $0, but still it's one positive indicator.作者: troymo 时间: 2011-7-11 19:24
Another way to look at it is what you are paying for net assets. If two companies have the same growth and risk outlooks, I would rather pay less per $ of net assets than more.作者: MiniMe7 时间: 2011-7-11 19:24
^^ Agreed with Investor83, all the explanations above address the "all things equal" argument and dont consider the justified P/B = 1 + (ROE-r)/(r-g) and the PV of residual income. Since this is a part of Equity and is so big, I think it is an important part to understand from a valuation of future income perspective.作者: needhelp1700 时间: 2011-7-11 19:24
In general, you just want to pay a lower price for things, all else being equal. In general you want a lower Price/anything ratio because that indicates the stock is undervalued relative to peers with higher Price/whatever ratios (all else being equal, obviously other information could mitigate the ratios)作者: ayaz_mahmud369 时间: 2011-7-11 19:24
I think the posts here are making this too simplistic for the point of the level 2 exam which is valuation. In a static environment, P/B says that at this moment, the liquidiation value of assets are B and you are paying P for them. Relating price in a static environment is not realistic with a going concern company/asset as it doesnt take into account future cash flows. Would you make the same assumption for the price of 2 bonds with par value of 1000? No you would look at the coupons and time left to maturity. I think this is more comparable than "you want to pay less". Now if you have 2 companies with the same ROE and R then the higher P/B would be overpriced. But if one company has ROE 2X r then that one should have a higher P/B and it isnt overpriced.作者: busterbluth 时间: 2011-7-11 19:24
The original question is:
Why is a lower P/v better than a higher P/V as compared with another co?
So, justified P/B is not the issue here. You always have to assume all else equal unless you are told otherwise.
Is a P/E of 10 better than a P/E of 15? Yes it is.作者: liquidity 时间: 2011-7-11 19:25
BizBanker Wrote:
-------------------------------------------------------
> I think the posts here are making this too
> simplistic for the point of the level 2 exam which
> is valuation. In a static environment, P/B says
> that at this moment, the liquidiation value of
> assets are B and you are paying P for them.
> Relating price in a static environment is not
> realistic with a going concern company/asset as it
> doesnt take into account future cash flows. Would
> you make the same assumption for the price of 2
> bonds with par value of 1000? No you would look at
> the coupons and time left to maturity. I think
> this is more comparable than "you want to pay
> less". Now if you have 2 companies with the same
> ROE and R then the higher P/B would be overpriced.
> But if one company has ROE 2X r then that one
> should have a higher P/B and it isnt overpriced.
I don't agree with your statement that P/B equals only the price of the stock to liquidation value of assets, with no consideration of future cash flows.
P/B intrinsically (through justified P/B or the RI model) takes into account the present value of future cash flows by justifying a higher price for the going concern vs. the value of net assets due to residual income in the future.
I don't think any of the answers above were saying that a P/B of 1.2 is always better than a P/B of 1.3. You obviously have to consider the specifics of the comparison, but when comparing two firms who you believe have equal growth opportunities, or equal risk, you can use the P/B as a relative valuation tool as the P/B should reflect the present value of excess future economic income.
