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P/B ratio, aka price-to-book ratio, simply shows how much money each share costs divided by how
much book value per share the company has. This gives investors a better sense of how much of the
price of a share is represented by those tangible assets. A company’s “book value” — also known as its
“accounting value” — is the value of everything tangible that a company owns. So, if you’re looking at a
company like Coca-Cola, its book value would include all of its bottling plants and buildings, any
aluminum they might have purchased in advance to turn into cans, any stock currently sitting in their
warehouses, trucks — pretty much all of it. But, intellectual property — like the value of Coke’s brand,
for instance — has no book value.
You have to be careful when looking at book value as it will tend to dramatically undervalue something
like a software company, where you can have a lot of success without ever accumulating a lot of book
value. However, some people will view a company’s P/B ratio as important because those tangible
assets have a clear value even if the company completely tanks. The base value of things like vehicles or
real estate aren’t going to dramatically rise and fall depending on the company’s performance, so they
can be viewed as a little bit more stable.
This is the same basic concept as the P/B ratio, but the “price-to-cash” ratio looks at how much cash is
on hand as compared to the price of a share. While the assets that make up most of a company’s book
value are tangible and will hold their value on many occasions, cash is even better. Not only will your
cash not lose value just because your company is struggling, but cash on hand can allow a company to
be more flexible in dealing with adversity — not unlike how an emergency fund can help you navigate
unemployment or a large, unexpected expense. As such, companies with lower P/C ratios have more
cash on hand relative to their share price.
Market cap — short for market capitalization — is the market value of a company, determined by
adding up the total value of all the outstanding stock. It’s an easy way to compare how valuable the
entire company is based on how much the share price is at the moment. Generally speaking, the larger a
company’s market cap, the more stable it is on the market. Gains tend to be smaller, but losses are also
much smaller, so larger companies tend to offer a little bit more safety than their smaller counterparts.
Methodology
Using the stock screener offered on Finviz.com, the study filtered stocks to remove any that weren’t
based in the United States, had a market cap under $10 billion and had a P/B ratio under 3. That turned
up a list of 141 different stocks. Then, the study removed any stocks with a P/C ratio over 100, reducing
the list to just 102 stocks. From there, the researcher removed any stocks in traditionally “cyclical”
industries per their discretion, further reducing the list to 52 companies, of which the two with the
lowest market cap were discarded. Market cap figures were sourced from Yahoo Finance on March 10,
2020.