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.