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Price to book ratio

The price-to-book ratio (a.k.a. P/B) is the market capitalization divided by the amount of shareholder's equity.

Expanded Explanation

"Book value" is another phrase for "net worth." It is how much a company is worth after all liabilities have been paid or subtracted out. If the assets are greater than the liabilities, then it will be positive (a good thing). This is the theoretical liquidation value of the company -- what you have left if you sell all the assets and pay off all the liabilities.

If that number is divided into the market cap of the company, that gives a P/B ratio. If it is lower than 1.0, then the company is selling below its theoretical liquidation value and could be considered a value. However, not all assets are created equal.

In other words, not all assets are salable. Goodwill, for instance. Goodwill is the amount above the book value that an acquiring company pays when it purchases another company. It is supposed to represent intangible items such as the purchased company's good name, its customer lists, etc. But can you really go out and sell that goodwill and get anything for it, much less the amount carried on the books of the purchasing company? Probably not.

Therefore, many investors look at tangible book value -- that is, book value without intangible assets such as goodwill included. This will be lower than book value if there are any intangible assets on the books, resulting in a lower, "P/TBV" (for "tangible book value") ratio. However, this is likely a more accurate measure of the company's worth and how the market is pricing the company.

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