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Finance Dictionary and Glossary of Investment Terms
The latest closing price of the stock divided by the most recent quarter''s book value per share. (Book value is simply assets minus liabilities.) Also known as the price/equity ratio. A favorite of strict value investors, the price/book ratio gives some idea of whether you''re paying a little or a lot for what would be left of the company if it went out of business immediately. A price/book ratio of less than one causes value hunters to salivate. One reason is that basic accounting principles, geared to err on the side of conservatism, typically understate a company''s book value, since assets must be accounted for at cost less depreciation. Thus, a factory could have little or no value on the balance sheet even though, if it were for sale, it might bring millions. Given all this, a very low price to book ratio makes some fundamental investors feel that an ability to generate earnings as well is almost gravy.As with most ratios, this one will vary by industry. The price/book ratio can be especially useful in any field where asset values are fairly certain. The thrift industry is one example; since a thrift''s largely financial assets are much easier to value than those of an industrial concern, the price/book ratio for a thrift is not as subject to accounting vagaries.The Price/Book Ratio for an entire portfolio is the weighted average of the price/book ratios of all the stocks in a mutual fund''s portfolio.