Price to book ratio
Here is my video on the price to book ratio, how it is used, calculated, and what it helps to evaluate.
video transcript
The price to book ratio is a common metric used by people to help gauge whether a stock is cheap or not. This ratio is most effective and important with a stock that has cash moving in and out of the corporation often. For example, the price to book ratio for a bank stock is very important as they deal with cash and manage it, whereas for a stock like McDonald's or something, this ratio may not be as useful. When you are looking at the price to book ratio you are taking the current share price of a stock and dividing it by the book value per share. Now, one thing to understand here is that the book value is equivalent to the owner's equity, so you always want to make sure that you don't get the book value mixed up. The book value per share is something that most companies report during quarterly earnings, and so does Bank of America. The book value per share that was last reported by Bank of America is 20 dollars and 75 cents. You then go on to divide the current share price of 14.72 by the book value per share 20.75. After doing the math, you should get about 0.71 rounded. Now, as we look at the price to book ratio calculated by the third party we see, that we have the identical price to book ratio. Now, you're probably wondering, is this ratio good or bad? Well, the general rule of thumb is that anything below 1 is relatively cheap, while anything above 1 or 2, is a stock you may want to proceed with caution. Again, you must remember that this ratio is something that is more applicable to some stocks rather than others, and Bank of America is a stock where the price to book ratio should always be calculated or factored in. Hopefully, in this video you learned how to calculate price to book ratio, and what it represents.