For Immediate Release
Chicago, IL – May 5, 2020 – Stocks in this week’s article are Eldorado Resorts ERI, Canadian Solar CSIQ and Acco Brands Corp. ACCO.
Pick These 3 Winning Stocks on Favorable P/B Ratio
While there are a host of valuation metrics at disposal, the first to cross one’s mind is the price-to-earnings (P/E) ratio. However, in case of loss-making companies, the P/E ratio is negative. In such a scenario, price-to-sales (P/S) ratio could indicate the hidden strength in the business.
The price-to-book ratio (P/B ratio) is also an easy-to-use tool for identifying low-priced stocks that have high-growth prospects.
P/B ratio is used to calculate how much an investor needs to pay for each dollar of book value of a stock. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
What is Book Value?
To begin with, it is important to understand what book value is. Book value is the total value that would be left over, according to the company’s balance sheet, if it goes bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidates all its assets after paying off all its liabilities.
It is calculated by subtracting total liabilities from the total assets of a company. In most cases, this equates to common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from total assets to determine book value.
Understanding P/B Ratio
By comparing the book value of equity to its market price, we get an idea of whether a company is under- or overpriced. However, like P/E or P/S ratio, it is always better to compare P/B ratios within industries.
A P/B ratio less than one means that the stock is trading at less than its book value, or the stock is undervalued and therefore a good buy. Conversely, a stock with a ratio greater than one can be interpreted as being overvalued or relatively expensive.
For example, a stock with a P/B ratio of 2 means that we pay $2 for every $1 of book value. Thus, the higher the P/B, the more expensive the stock.
But there is a caveat. A P/B ratio less than one can also mean that the company is earning weak or even negative returns on its assets, or that the assets are overstated, in which case the stock should be shunned because it may be destroying shareholder value. Conversely, the stock’s price may be significantly high — thereby pushing the P/B ratio to more than one — in the likely case that it has become a takeover target, a good enough reason to own the stock.
Moreover, the P/B ratio isn't without limitations. It is useful for businesses — like finance, investments, insurance and banking or manufacturing companies — with many liquid/tangible assets on the books. However, it can be misleading for firms with significant R&D expenditure, high debt, service companies or those with negative earnings.
In any case, the ratio is not particularly relevant as a standalone number. One should analyze other ratios like P/E, P/S and debt to equity before arriving at a reasonable investment decision.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/912701/pick-these-3-winning-stocks-based-on-a-favorable-pb-ratio
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Canadian Solar Inc. (CSIQ) : Free Stock Analysis Report
Eldorado Resorts, Inc. (ERI) : Free Stock Analysis Report
Acco Brands Corporation (ACCO) : Free Stock Analysis Report
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