In the present volatile stock market, value analysis, is becoming more and more important. When analyzing value stocks, most investors use the P/E ratio to search for lucrative stocks, but there are other ratios that an investor can consider, like the price-to-sales ratio (P/S) and price-to-book (P/B) ratio. The P/S ratio is simply price divided by sales. One of the reasons P/S is a better choice is because it looks at sales rather than earnings like the price-to-earnings ratio. However, P/B used less often, is also an easy-to-use valuation tool for identifying low-priced stocks with great returns.
The P/B ratio is calculated as below:
P/B ratio = market price per share/book value of equity per share.
What Is Book Value?
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 the 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. 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 expenditures, high-debt companies, service companies or those with negative earnings.
In any case, the ratio is not particularly relevant as a standalone number. One should also analyze other ratios like P/E, P/S and debt-to-equity before arriving at a reasonable investment decision.
Price-to-Book (common Equity) less than X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.
Price-to-Sales less than X-Industry Median: The P/S ratio determines how much the market values every dollar of the company’s sales/revenues — a lower ratio than the industry makes the stock attractive.
Price-to-Earnings using F(1) estimate less than X-Industry Median: The P/E ratio (F1) values a company based on its current share price relative to its estimated earnings-per-share — a lower ratio than the industry is considered better.
PEG less than 1: PEG ratio links the P/E ratio to the future growth rate of the company. PEG ratio portrays a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued and investors need to pay less for a stock that has bright earnings growth prospects.
Current Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.
Average 20-Day Volume greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Value Score equal to A or B: Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.
Here are five of the 14 stocks that qualified the screening:
Manulife Financial Corporation (NYSE:MFC), an insurance-based financial services organization in Canada currently has a Zacks Rank #2 and a Value Score of A. It has a three-to-five year EPS growth rate of 10.0%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Jazz Pharmaceuticals (NASDAQ:JAZZ), a small drugmaker, currently has a Zacks Rank #2. It has a three-to-five year EPS growth rate of 15.7% and a Value Score of B.
DaVita (NYSE:DVA), a kidney dialysis services provider, currently has a Zacks Rank #2 and a Value Score of A. It has a three-to-five year EPS growth rate of 19.5%.
American Axle & Manufacturing (NYSE:AXL) is the leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company has a projected three-to-five year EPS growth rate of 8.1%. ON Semiconductor (NASDAQ:ON) currently has a Zacks Rank #1 and a Value Score of A.
Huntsman Corporation (NYSE:HUN), a chemical product manufacturer, has a projected three-to-five year EPS growth rate of 8.5%. Huntsman currently has a Zacks Rank #1 and a Value Score of A.
You can get the rest of the stocks on this list by signing up now for your two-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance
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