Price-To-Book Ratio or P/B Ratio is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. A lower P/B ratio could mean that the stock is undervalued. This ratio also gives some idea of whether you’re paying too much for what would be left if the company went bankrupt immediately.
What price should you pay for a company’s shares? If the goal is to unearth high-growth companies selling at low-growth prices, the price-to-book ratio (P/B) offers investors a handy, albeit fairly crude, approach to finding undervalued companies. It is, however, important to understand exactly what the ratio can tell you and when it may not be an appropriate measurement tool.
A P/B ratio of less than 1.0 can indicate that a stock is undervalued, while a ratio of greater than 1.0 may indicate that a stock is overvalued.
NiSource Inc. (NYSE:NI) at its latest closing price of $16.83, it has a price-to-book ratio of 0.82, compared to an industry average at 1.57. Tracking last five years, its sales decline -0.50% a year on average and the company’s net income advanced by an average rate of 14.90%.
Precision Drilling Corp (USA) (NYSE:PDS) ended last trade at $4.96 a share and the price is up more than -1.98% so far this year. The company maintains price to book ratio of 0.80 vs. an industry average at 0.64. Its sales stood at 14.40% a year on average in the period of last five years. For the same period, its EPS moved at an average decline rate of -28.50%.
Patterson-UTI Energy, Inc. (NASDAQ:PTEN)’s profit did move up16.10% a year on average over the past five years and its sales growth moved at higher pace over the same period with a raise of 47.80% a year on average. The stock is trading at a low P/B ratio of 0.87 (an industry average is 0.64), above its 1-year low of $13.16.