P/B to value financial firm? physical, correct, service, through, assets

hw0799

was going through some Q-bank and they asked what metric would be most appropriate to value a financial firm, P/B, P/S, or dvd yld. they stated correct answer was P/B, yet a few questions prior mentioned P/B not good metric for a service oriented cos, not much in way of physical assets. thanks, John

MiniMe7

and what types of firms would P/B be INAPPROPRIATE for?

chandsingh

P/B is a good measure for firms where most of the assets are marked at fair value - this is why a financial firms like banks are most suited for P/B valuation. All other firms where a lot of the value is intangible and its assets are not captured at fair value make for poor candidates for P/B analysis

Kapie

AndrewUNH Wrote:
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> and what types of firms would P/B be INAPPROPRIATE
> for?


Anything w/ a lot of intangible value or service oriented businesses (human capital). You would never do a P/B ratio on Google, because all their value is in the IP of their software for the search engine, etc. You would never do a P/B ratio on a firm like WPP (largest advertising firm in the world), law firms, or a recruiter/consulting firm like Heidrick Struggles (largest headhunter/recruiter globally). Both businesses rely entirely on the margins you are making (what you bill per hour vs. what you pay your employees per hour). The P/B of your assets is meaningless.

P/B can be inappropriate for some other firms depending on the circumstances. You basically have to know the business in the first place, though.