Price To Book Ratio (P/B)

Investors looking for hot stocks aren’t the only ones trolling the markets. A quiet group of folks called value investors go about their business looking for companies that the market has passed by.

Some of these investors become quite wealthy finding sleepers, holding on to them for the long term as the companies go about their business without much attention from the market, until one day they pop up on the screen, and some analyst “discovers” them and bids up the stock. Meanwhile, the value investor pockets a hefty profit.

Value investors look for some other indicators besides earnings growth and so on. One of the metrics they look for is the Price to Book ratio or P/B. This measurement looks at the value the market places on the book value of the company.

You calculate the P/B by taking the current price per share and dividing by the book value per share.

P/B = Share Price / Book Value Per Share

Like the P/E, the lower the P/B, the better the value. Value investors would use a low P/B is stock screens, for instance, to identify potential candidates.

Price To Sales Ratio (P/S)

You have a number of tools available to you when it comes to evaluating companies with earnings. The first three articles listed at the bottom of this article, in particular deal with earnings directly. You can add the two others on dividends and the one on return on equity to the list as specific to companies that are or have made money in the past.

Does that mean companies that don’t have any earnings are bad investments? Not necessarily, but you should approach companies with no history of actually making money with caution.

The Internet boom of the late 1990s was a classic example of hundreds of companies coming to the market with no history of earning – some of them didn’t even have products yet. Fortunately, that’s behind us.

However, we still have the problem of needing some measure of young companies with no earnings, yet worthy of consideration. After all, Microsoft had no earnings at one point in its corporate life.

One ratio you can use is Price to Sales or P/S ratio. This metric looks at the current stock price relative to the total sales per share. You calculate the P/S by dividing the market cap of the stock by the total revenues of the company.

You can also calculate the P/S by dividing the current stock price by the sales per share.

P/S = Market Cap / Revenues
or
P/S = Stock Price / Sales Price Per Share

Much like P/E, the P/S number reflects the value placed on sales by the market. The lower the P/S, the better the value, at least that’s the conventional wisdom. However, this is definitely not a number you want to use in isolation. When dealing with a young company, there are many questions to answer and the P/S supplies just one answer.