Question

Which of the following is not a limitation of the P/B ratio?

1. Questionable comparability among companies widely different in the average age of the assets, or in the mix of financial vs. nonfinancial assets

2. Comparing price with book value of equity per share is a logical mismatch

3. Can be misleading as a valuation indicator when comparing companies differ

   significantly in the levels of assets because of different business models

4. Do not reflect unrecognized intangible assets as critical operating factors for certain

   companies (e.g., human capital for service companies)

Answer 1

Comparing price with book value of equity per share is a logical mismatch; There is no limitation of the ratio which establishes this statement.

Whereas Difference in average age of assets can challenge the comparability of the ratio, can be misleading if the assets differ significantly, and P/B ratio only recognise assets that are in the Balance sheet hence comparing companies like Google, Apple where their intangible assets cant be seen in Balance sheet is a limitation.