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Price to Tangible Book Value (PTBV)

Definition

Price to Tangible Book Value (PTBV) is a financial ratio used to compare a company’s market price with its tangible book value per share. The tangible book value refers to the net asset value of a company, excluding intangible assets such as goodwill, patents, and copyrights. A lower PTBV indicates that the stock is undervalued, whereas a higher PTBV may suggest that it is overvalued.

Phonetic

The phonetics for Price to Tangible Book Value (PTBV) is:P – /pi:/T – /ti:/B – /bi:/V – /vi:/and the whole term “Price to Tangible Book Value” can be said as /ˈpraɪs tuː ˈtændʒəbəl buːk ˈvælju:/(Note: “:’after a phonetic symbol means a long sound)

Key Takeaways

<ol><li> PTBV is a valuation ratio expressing the price of a company against its tangible assets. It provides the value a company would have if it were to go bankrupt and its tangible assets were sold.</li><li> A low PTBV can indicate that a company may be undervalued, but such a situation may also be due to other factors such as poor management or significant debt. Conversely, a high PTBV may indicate overvaluation or that the company enjoys an intangible value (like a strong brand or innovative capability). Therefore, PTBV should not be used in isolation but in conjunction with other financial metrics.</li><li> PTBV is especially useful when analyzing companies with significant tangible assets, such as manufacturing or real estate companies. It may be less applicable for service-oriented companies or those heavily reliant on intangible assets, such as tech companies.</li></ol>

Importance

Price to Tangible Book Value (PTBV) is a critical business/finance term and valuation metric that acts as a gauge of a company’s current market value relative to its tangible net asset value. It’s primarily used in asset-heavy industries, like banking, industrial and manufacturing sectors. This ratio is significant because it considers only tangible assets in its calculation, thus providing a more conservative perspective of a company’s worth. Unlike P/E ratio and other metrics, it excludes goodwill, patents, and trademarks which can dramatically overstate a company’s actual physical worth. Therefore, a lower PTBV can indicate that a company is undervalued, offering potential for investment, while a higher PTBV may suggest overvaluation. This metric, therefore, serves as a vital tool for comparing firms, assessing their financial health and unearthing value opportunities in investment decision-making.

Explanation

The Price to Tangible Book Value (PTBV) is a valuation ratio that expresses the price of a company’s stock in relation to its tangible book value per share. The purpose of PTBV is to determine the relative value-investment quality of a company by taking its market price per share and dividing it by its tangible book value per share, which excludes the intangible assets such as patents and intellectual properties. Tangible book value can also take liabilities into account, leading to more comprehensive insight. This metric offers a way to identify potentially under or overpriced securities compared with the company’s actual net asset value. Financial analysts widely use the PTBV ratio when analyzing organizations in sectors where tangible assets, like property, machinery, inventory etc., play significant roles, such as manufacturing, construction or financial institutions. Investors and analysts also find this ratio helpful when comparing companies within the same industry, or comparing a company to its own historical records. The lower the ratio, the more financially attractive the company is considered to be. Conversely, companies with higher ratios are seen as potentially overvalued. However, this ratio alone should not be the only consideration in making investment decisions.

Examples

1. Example 1: Alphabet Inc. (Google’s parent company)Let’s assume Alphabet Inc. reported a total tangible asset worth $200 billion at the end of the fiscal year 2021. If its total liabilities for the same year were $100 billion, the tangible book value would be $100 billion ($200 billion – $100 billion). Then, if the company’s market cap at the end of 2021 was $1.5 trillion, the PTBV would be calculated by dividing the market cap with the tangible book value – thus, PTBV would be 15. 2. Example 2: Exxon Mobil CorporationAssuming Exxon Mobil reported total tangible assets of $300 billion and total liabilities of $200 billion at the end of the fiscal year 2021. Its tangible book value comes down to $100 billion. If the company’s market cap stands around $250 billion, then PTBV will be 2.5. 3. Example 3: Amazon Inc.Say, the total tangible assets reported by Amazon at the end of 2021 were $100 billion and the liabilities were $50 billion. This puts the tangible book value at $50 billion. If the market cap of Amazon at the end of 2021 stood at $1.7 trillion, then we calculate PTBV by dividing the market cap by the tangible book value. In Amazon’s case, the PTBV would be 34. Note: This is a simplification. The actual calculation may encompass more detail depending on the complexity of the company’s financial data. These examples are meant to illustrate how the PTBV ratio works in principle. The numbers used do not represent the real-life valuation of the cited companies.

Frequently Asked Questions(FAQ)

What is Price to Tangible Book Value (PTBV)?

Price to Tangible Book Value (PTBV) is a financial ratio used to compare the market price of a company’s stock to its tangible book value per share. The tangible book value per share is the per-share value of all tangible assets minus all liabilities.

How is PTBV calculated?

PTBV is calculated by taking the latest closing price and dividing it by the most recent quarter’s book value per share, excluding all intangible assets.

What does a high PTBV ratio mean?

A high PTBV ratio could indicate that a company’s stock is overvalued or that the company is earning a very high return on its tangible assets. Conversely, a lower PTBV may suggest the stock is undervalued or the company is not generating a significant return.

Is lower PTBV always better?

Not necessarily. Lower PTBV could also suggest that the business isn’t very strong, being undervalued due to poor financial health. So, it’s crucial to look at other factors or financial ratios as well.

How can investors use PTBV?

Investors can use PTBV as one of several financial ratios to assess and compare the value of companies in the same industry. It can be especially useful when looking at companies with significant tangible assets, such as manufacturing or construction companies.

What is considered a good PTBV ratio?

There’s no set ‘good’ or ‘bad’ PTBV ratio as it can depend on the industry, market conditions, and the specific circumstances of the company. However, a lower PTBV ratio could potentially indicate a more financially attractive investment opportunity.

How does PTBV differ from P/B ratio?

Both ratios compare the market value of a company to its book value, but PTBV excludes intangible assets from its calculation, such as patents, trademarks, and goodwills, making it a stricter measure of a company’s net asset value.

Are there limitations to using PTBV?

Yes, limitations of PTBV include changes in a company’s business model that could significantly impact its tangible asset base, the occasional subjectivity of the valuation of tangible assets, and it may not be a meaningful value for companies in service-oriented sectors.

Related Finance Terms

  • Market Value: The current price at which an asset or service can be bought or sold, which PTBV uses to measure a company’s worth.
  • Equity: A stock or any other security representing a direct ownership interest. This is used in the PTBV ratio’s calculation as this gives the net tangible assets attributable to shareholders.
  • Valuation Ratio: A fundamental analysis ratio (like PTBV) that compares a company’s stock value to its book value.
  • Tangible Assets: Physical and measurable assets like machinery, buildings, and land. PTBV specifically uses a company’s tangible assets, ignoring its intangible assets.
  • Financial Statement Analysis: The process of analyzing a company’s financial statements for decision-making purposes. PTBV is commonly used in this process to understand a company’s real-world asset value.

Sources for More Information

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