The Importance of Book Value
Multiple studies have shown that price to book value (P/B) is the most effective valuation measure in determining a stock’s performance. Although the price-earnings ratio (P/E) is considerably more popular, buying at low price-to-book multiples leads to better returns.
Book value is the theoretical value of what a company’s net assets are worth. It is also referred to as equity. In theory, book value is equivalent to the amount of cash shareholders would receive if all of the company’s debts, both short-term and long-term, were paid off and all remaining assets were sold. Its compelling use as a measure of valuation can be explained in one statement:
No quality company should sell for a price equivalent to or less than its theoretical liquidation value.
...To continue reading this article you must be registered with AAII.
Already registered with AAII? Login to read the rest of this article.
to read this article and receive access to future AAII.com articles.