| Price to Book-Ratio is defined as (Current Price of | | | | the PB ratio of the industry go to the step 1 |
| a share)/(Book Value of a share). The Current | | | | (choose another company). |
| Price of a share is the current price on the stock | | | | 5. Check the ROE ratio and its growth. |
| market, while the Book Value of a share is the | | | | 6. If the ROE ratio isn't growing, or if it is below |
| value of the share stated in the annual report. | | | | average ROE for the industry, then go to the |
| After liquidation of the firm and selling every brick, | | | | step 1 (choose another company). |
| in theory, you should get book value. Therefore, | | | | 7. Check for Debt to Equity ratio. If it is low |
| the Current Price should be greater then Book | | | | (perhaps even zero) then this company might be |
| Value meaning that Price-to-Book ratio should be | | | | worth to buy. |
| greater than 1.0, but that is not always true. | | | | It is important to notice that low PB ratio might |
| In general, low Price to Book ratio of a company | | | | mean that there is something fundamentally |
| might indicate two things: the company is either | | | | wrong with that company. That is the reason |
| undervalued or in troubles. | | | | why you should check for other parameters to |
| Step by step procedure in selection of a potential | | | | see if it is really something wrong with the |
| winner based on low Price to Book ratio: | | | | company. Always assume that there is a reason |
| 1. Choose a company | | | | why the company has small PB ratio, and look for |
| 2. Find Price-to-Book ratio ratio for the company | | | | parameters that confirms that. If you find little or |
| 3. Find PB ratio for the industry of that company | | | | no evidence that the company is in troubles, then |
| 4. If the PB ratio for the company is greater than | | | | consider this as a buy signal. |