Price / Earnings (P / E) and Price / Sales (P / S) are the first ratios that come to an investor’s mind while narrowing down a list of undervalued stocks. However, the price-to-book ratio (P / E ratio), while underestimated, is also an easy-to-use valuation tool for identifying low-priced stocks with strong growth prospects.
The P / B ratio is calculated as below:
P / B ratio = market capitalization / book value of equity.
What is book value?
There are several ways to define the book value. Book value is the total value that would remain, according to the company’s balance sheet, in the event of immediate bankruptcy. In other words, this is what shareholders would theoretically receive if a company liquidated all of its assets after paying off all of its liabilities.
It is calculated by subtracting total liabilities from total assets of a business. In most cases, this is equivalent to common shareholders’ equity on the balance sheet. However, according to the company’s balance sheet, intangible assets must also be subtracted from total assets to determine book value.
Understanding the P / B Ratio
By comparing the book value of equity to its market price, we get an idea of whether a company is undervalued or overvalued. However, like the P / E or P / S ratio, it is always best to compare P / N ratios within industries.
An AP / E ratio of less than one means the stock is trading below its book value or the stock is undervalued and therefore is a good buy. Conversely, a stock with a ratio greater than one can be interpreted as being overpriced or relatively expensive.
For example, a stock with a P / N ratio of 2 means we pay $ 2 for every $ 1 of book value. Thus, the higher the P / B, the more expensive the action.
But there is a caveat. An AP / E ratio of less than one can also mean that the company is generating low or even negative returns on its assets, or that the assets are overvalued, in which case the stock should be avoided as it can destroy shareholder value. Conversely, the share price can be considerably high – thus pushing the P / B ratio to more than one – in the probable event that it has become a takeover target, reason enough to hold the share. ‘action.
In addition, the P / B ratio is not without limits. It is useful for businesses – like finance, investment, insurance, and banking or manufacturing companies – with many liquid / tangible assets on the books. However, this can be misleading for companies with large R&D spending, high debt, service companies, or those with negative profits.
In any case, the ratio is not particularly relevant as a stand-alone number. One should analyze other ratios such as P / E, P / S and debt / equity before making a reasonable investment decision.
Price to Book (Common Equity) below the X-Industry median: A P / B below the industry average implies that there is enough room for the stock to win.
Sales price below the X-Industry median: The P / S ratio determines the market value for every dollar of company sales / revenue – a lower ratio than the industry makes the stock attractive.
Price / earnings using the F (1) estimate lower than the X-Industry median: The P / E (F1) ratio rates a company based on its current stock price relative to its estimated earnings per share – a lower ratio than the industry is considered better.
PEG less than 1: The PEG relates the P / E ratio to the company’s future growth rate. The PEG ratio gives a more complete picture than the P / E ratio. A value less than 1 indicates that the stock is undervalued and that investors should pay less for a stock that has good prospects for earnings growth.
Current price greater than or equal to $ 5: They must all trade at a minimum of $ 5 or more.
Average volume over 20 days greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.
Rank of Zacks less than or equal to # 2: Zacks Rank # 1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.
Value Note Equal to A or B: Our research shows that stocks with a value score of A or B when combined with a Zack # 1 or # 2 rank offer the best opportunities in the value investing space.
Here are seven of the 25 actions that qualified the screening:
Walk-in locker FL, a footwear and sportswear retailer, has a projected 3 to 5 year EPS growth rate of 29.1%. He currently has a Zacks Rank # 2 and a Value Score of A. You can see The full list of today’s Zacks # 1 Rank stocks here.
Hibbett, Inc. HIBB, a sports-inspired fashion retailer, has a 3 to 5 year projected BPA growth rate of 22.4%. He currently has a Zacks # 1 ranking and a value score of A.
Group 1 Automotive GPI, a leading automotive retailer, has a projected 3 to 5 year EPS growth rate of 13.2%. He currently has a Zacks Rank # 2 and a Value Score of A.
ICL Group ICL, a manufacturer of specialty fertilizers and specialty phosphates, flame retardants and water treatment solutions, has a Zacks Rank # 2 and a Value Score of B. The company has a projected BPA growth rate of 3 to 5 years of 24.4%.
Conn’s CONN, a specialty retailer, has a Zacks Rank # 2 and a Value Score of A. The company has a 3 to 5 year projected EPS growth rate of 23.0%.
Teak Resources Limited TECK, a diversified resource company engaged in mining and mining development, has a projected 3 to 5 year EPS growth rate of 32.8%. He currently has a Zacks # 1 ranking and a value score of B.
Encompass health company EHC, an integrated health service provider, has a projected 3 to 5 year BPA growth rate of 18.0%. He currently has a Zacks Rank # 2 and a Value Score of A.
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Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
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