S & P500 Book Value Price Ratio
Historically, the starting point for estimating the value of a company has been its equity value, that is, the value of the company's assets minus the value of its debts. The Book Value Price ratio has been the most used to value listed companies according to the equity value criterion. In this article I will explain what the Book Value Price ratio measures, we will see how it is calculated with an example, when to use it and its advantages and disadvantages.
What is the Book Value Price ratio?
The Book Value Price ratio, also called Book Value Price or PVC (“Price to Book Value” or “P / BV” in English) is the stock market ratio that measures the relationship between the price at which the shares are traded with the value of your equity, that is, the book value of your assets minus the book value of your debts.
Historically it has been the ratio most used to value listed companies, although it has lost its validity in recent times. Later I will explain the reasons for this loss of popularity among investors.
The formula for the Book Value Price ratio is as follows:
PVC = Price per Share / Equity per share
It can also be calculated as follows:
PVC = Capitalization Bursátil / Own funds
Interpretation of the PVC ratio
As we have already seen, the result of the ratio calculation measures the relationship between the price paid for a company and its book equity value (assets minus debts). The result can be:
- Less than 1: The price at which the company is listed is less than its book value. In this case, we could be facing a purchase opportunity, although in many cases it is due to an impairment in the real value of its assets not reflected in the accounting.
- Equal to or around 1: The company is listed at a price that is close to its book value.
- Higher than 1: The company trades at a price higher than its book value. This usually happens in the vast majority of cases for reasons that I will explain later.
Real example of the calculation of the Price-Book Value ratio: Inditex
Next you will see how simple it is to calculate the PVC ratio with a real example. I have chosen the Galician textile multinational Inditex, but the calculation is just as simple for any other company. We start from the following data:
- Inditex market capitalization: 66.478 million
- Inditex's equity: 9.246 million
We divide the capitalization between the equity, and the result is:
PVC Inditex: 7.19
Although this time I have performed the calculation, in most financial information websites The calculation is already performed automatically, so in most cases you will not have to bother doing it yourself. Here you have a link to the section of Mister Market.
Another drawback of this ratio is that the book value in many cases does not reflect the real value of the company's assets. For example, if a company bought a building in the 60s, its real value will be much higher than the value that is reflected in the accounting. On the contrary, if the company bought a building in the year 2.007, during the peak of the real estate bubble, it is possible that its real value is half of what the accounting reflects.
To overcome this last inconvenience there are variations of this ratio that I will explain to you in future articles.
When to use the PVC ratio?
My recommendation is to always use it as a starting point when evaluating companies, since it will give us a rough idea of the company's equity value. However, on few occasions it will be the main ratio to take into account for the valuation of companies, except in very few cases.