Question

Explain and demonstrate how P/BV can be use in evaluating potential stocks investment.  

Answer 1

P/BV ratio is calculated as market value of equity/ book value of equity

p/bv ratio standardizes the market price per share by dividing it with book value and shows the proportion of difference from the historical period

It is mostly positive even when EPS is negative and is a more stable measure than EPS. It is more stable for firms holding liquid assets and is a good measure for companies expected to go out of business. Empirical research shows P/B differences are significantly related to long term average stock returns.

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