How to tell when a stock is undervalued?

Moomoo News ·  01/23/2021 11:27  · Exclusive

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In this article, we will go through some questions like:

  • What is Price-To-Book (P/B) ratio?

  • Why use the P/B ratio?

  • How to use the P/B ratio?

  • Limitations of using P/B Ratio

  • How to check out the P/B ratio of a stock?

What is Price-To-Book (P/B) ratio?

The formula of the P/B ratio is:


To determine a company's book value, you'll need to look at its balance sheet. 

Also known as shareholder's equity or stockholder's equity, this amount is equal to the company's assets minus its liabilities.

In other words, if a company liquidated all of its assets and paid off all its debt, the value remaining would be the company's book value.

Key takeaway: The P/B ratio measures the market's valuation of a company relative to its book value.

Why use the P/B ratio?

A lower price-to-book ratio could indicate that a stock is undervalued. When you're comparing two stocks with similar growth and profitability, P/B can be useful for determining which is the best value at a given moment.

Using P/B ratio

On the surface, it's an effective metric that can compare a stock's market cap to what it owns versus what it owes.

Traditionally, any value under 1.0 is considered a good P/B value, indicating a potentially undervalued stock.

Depending on the industry, many companies' asset costs are priced not according to market value but value carried at the time of acquisition.

It's helpful to identify some general parameters or a range for P/B value, and then consider various other factors and valuation measures that more accurately interpret the P/B value and forecast a company's potential for growth.

Key takeaway: The market value of equity is typically higher than the book value of a company, P/B ratios under 1 are typically considered solid investments.

Limitations of using P/B Ratio

When accounting standards applied by firms vary, P/B ratios may not be comparable, especially for companies from different countries. Additionally, P/B ratios can be less useful for service and information technology companies with little tangible assets on their balance sheets.

How to check out the P/B ratio of a stock

Take $Bank of America Corporation(BAC.US)$ for an example:

Go to the Quotation page and click the "Analysis" tab.


Then you will be able to see the current P/B ratio as well as its historical trend(going upward).


Source: The Motley Fool, Investopedia

Editor: Tommy

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