Here is a summary of the main points:
- Stock valuation aims to buy good stocks at a fair or cheap price.
- One of the valuation methods used is Price to Book Value (PBV).
- Book value represents the equity or net worth of a company, which is the right of all shareholders.
- To calculate the book value per share, divide the total book value by the total number of shares.
- PBV is the comparison between the stock price and the book value per share.
- If PBV is less than one, the stock is considered cheap or undervalued.
- If PBV is between 1 and 1.5, the stock is considered fair.
- If PBV is greater than 1.5, the stock is considered expensive or overvalued.
- PBV can be used as a benchmark to assess whether a stock is cheap or not, but it should not be the sole factor in investment decision-making.
- Some investors compare the current PBV with the historical PBV of the company or with the average PBV of the industry or similar companies.
HOW TO EASILY EVALUATE WHETHER A STOCK IS CHEAP OR EXPENSIVE | Price to Book Value Ratio
When buying stocks, we should buy stocks from good companies, but it is also important to buy them at a fair or cheap price.
Assessing whether the price of a stock is fair, expensive, or cheap is called stock valuation.
There are various methods of stock valuation, but in this article, we will discuss one of the most basic and widely used methods, which is the Price to Book Value. Read the article for more details.
Equity or net worth of a company is often referred to as book value. Book value or net worth of a company is the right of all shareholders. So, how do we evaluate whether a business is cheap or not through its book value?
PBV is used to assess whether a stock is cheap or expensive based on the comparison between the stock price and the net worth per share (book value per share).
The first example in the video is a fictional company called PT Avengers. The total net worth (book value) of the company is 200 billion Rupiah for all shareholders. The total number of shares is 1 billion. By dividing the total net worth by the number of shares, we get the book value per share of PT Avengers, which is 200 Rupiah per share.
If the market price of PT Avengers' stock is 100 Rupiah per share, it means that the company is being sold at a price lower than its net worth, making it undervalued or cheap. By dividing the stock price by the book value per share, we get a Price to Book Value (PBV) ratio of 0.5. A PBV value less than one indicates that PT Avengers' stock is being priced 50% cheaper than its net worth, making it still considered very cheap or undervalued.
The second example in the video is Bluebird, a taxi company. In its financial statement, the total equity (book value) of the company is 5 trillion Rupiah. The number of Bluebird shares is 2.5 billion. By using the equity value and the number of shares, we can calculate the book value per share of Bluebird, which is 2016 Rupiah per share.
On October 3, 2022, the stock price of Bluebird was 1350 Rupiah per share. By dividing the stock price by the book value per share, we get a PBV ratio of 0.67. Since the PBV value is less than one, Bluebird's stock is considered undervalued or cheap.
Ultimately, it's important to note that PBV is not the sole factor to consider when making investment decisions. The company's performance and other factors should also be evaluated. Some investors may use different PBV methods, such as comparing PBV with the company's historical values or the industry average PBV.
Disclaimer: This summary is for informational purposes only and is not an invitation to buy or sell stocks. It's essential to conduct thorough research and consult with financial professionals before making investment decisions.