The choice of valuation method or multiple is another sensitive issue that splits the value investing community into different camps. I am going to argue here that there are more similarities than differences between asset-based valuation methods and earnings-based valuation methods.
First, the price-to-book ratio can be renamed as the price-to-long term accumulated earnings. Book value of equity consists of retained earnings, share capital and accounting reserves. For companies with consistent profitability, the growth in book value is a proxy for the long-term growth rate in earnings.
Second, with certain stocks such as industrials, the bulk of the income producing assets such as property, plant and equipment and inventories are properly accounted for on the book. There is a circular reasoning at work here. Assets have value because they are income producing. Earnings have value as as long as the assets retain their income producing ability.
Lastly, both measures of book value and earnings are confined within the four walls of accounting. They are as perfect as they are imperfect. P/E investors can complain about the accuracy of asset valuation, but earnings is also full of distortions. They have their edge too. P/B allows loss-making companies to be compared with profitable ones on the same valuation metric. P/E is useful for valuing service-type companies like investment banks and consulting firms where their most valuable assets — their employees are expensed on the income statement.