Hi fellow investors,
This is Charlie Tian again. In my previous videos, I talked about the price-earnings ratio and the price-sales ratio, and in this video I want to talk about the price-book ratio. The price-book ratio measures the stock price relative to the net assets of the company.
Here the net assets means the total assets subscribed to the total liability of the company. It matters for the valuation by book ratio in terms of the equity of the company. This is why the ratio is determined by price divided by book.
On GuruFocus.com, you can find the book ratio of every company. If we looked at JPMorgan (JPM, Financial), for example, you can see right on the home page that the price-book ratio is listed. The current price-book ratio is 1.32.
The price-book ratio is a very useful ratio for measuring the valuation of financial companies such as banks and insurance companies because those kinds of companies make money off of their assets. Off of their assets, properties, investments and everything that they own. That is why the price-book ratio is a better ratio for financial companies.
We can also use the price-book ratio to determine when is a better time to invest in a financial company. Using the interactive chart, we can see the historical stock price for JPMorgan. Then we can add in the price at median P/E like we have done previously. Due to the earnings of JPMorgan being unstable, this line will not show up stable and you would not know when would be a better time to buy.
If you turn off that line and instead add in the price at median price-book line, you can see that JPMorgan has been sitting at a median ratio of 1.25. When the price drops below this line, it is a better time to buy. When the price is above it is not a good time to buy. 2002, 2009 and 2011 would all have been good times to buy.
Here in 2020, we see a peak that means it definitely was not a good time to buy. More recently, it has returned much closer to the median line and it is a better time to buy than earlier this year. This has been an example of how you can apply the price-book ratio to financial and insurance stocks.
If you have any questions or comments, please leave them below and I will answer them as soon as possible.
See you again next time,
Charlie Tian
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