Price to Book Value : what Mr Market is paying for ₹1 Asset

Book value of company is important beyond doubt. But more important is how much you are paying for that? Inshort what is the quality of the assets on book.

Say there are banks with holding big NPA on Book. Hardly any Reserves against it if the counter liability is come up for payment. Makes Them difficult to pay and reduce the Equity and wealth. Market don’t like that.

Sometimes, some Manufacturing company may acquire another one. With it, the debt and Rik attached with that business also joined to the Acquirer. Some costs may increase. Market don’t like it. So it pays less Price even if the acquisition may increase the Book value.

Best examples here is holding companies, Investment companies, insurance companies. Income stream for holding companies are mainly dividend from the subsidiaries. If the Asset performing good, then market may give them high Ratio. But there is one way of thinking that as the Asset will never sold out and so shareholder of holding company will never received that ONE TIME DIVIDEND WHICH IS CORE IDEA OF BOOK VALUE, MANY TIME MARKET GIVE THEM LESS THAN 1. 

Investment companies are more tricky here. Some investments are held to maturity, some are for trading, some are for short to mid term investment but not held to maturity. Risk Profile and Other things also different for them. Here we need to find case by case and then expected price to book.

Then there is category named start-up. Here Price is hardly available as they are not listed. But the future prospects may be good. That is Good and so Book Value or Price to book may need to ignore.

In short, Price to book and Book value per Share are important where there are assets available. For the companies working on Asset light approach, Price to Earning ratio is better.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me or @androidashu & @InsideFinanc on twitter