What is a Price-to-Tangible Book Value Ratio?
How Does a Price-to-Tangible Book Value Ratio Work?
The formula for the price to tangible book value is:
Price to Tangible Book Value = Share Price / Tangible Book Value per Share
For example, let's assume that Company XYZ has 10,000,000 shares outstanding, which are trading at $3 per share. The company also recorded $15,000,000 of tangible book value last year. Using the formula above, we can calculate Company XYZ's price to tangible book value as follows:
Price to Tangible Book Value = $3 / ($15,000,000/10,000,000) = 2.0
The data needed to calculate a company's tangible book value is usually on its balance sheet.
Why a Does Price-to-Tangible Book Value Ratio Matter?
The price-to-tangible book value ratio excludes the book value of a company's intellectual property and other intangible assets, such as patents and goodwill. As such, it represents what debtholders or investors would receive if the company liquidated its physical assets (assuming that it could get book value for all of those assets).
If a stock is trading below its tangible book value per share, analysts might consider the company undervalued because investors would receive more than the share price if the company were to liquidate. Likewise, if a company is trading above its tangible book value (as is the case in our example), investors could be left holding the bag if the company has to liquidate.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Trendlines are one of the most common and helpful tools in a trader's kit. They are used to show a stock...Read More →
Believe it or not, investing can be a lot like putting your wardrobe together. You can mix and...Read More →
Lowering your auto insurance payments can be easier than you think. For drivers shopping for a new auto insurance policy or renewing their current policy, a quick conversation with an...Read More →