A low ratio (less than 1) could indicate that the stock is undervalued (i.e. a bad investment), and a higher ratio (greater than 1) could mean the stock is overvalued (i.e. it has performed well).
Conventionally, a PB ratio of below 1.0, is considered indicative of an undervalued stock. Some value investors and financial analysts also consider any value under 3.0 as a good PB ratio. However, the standard for “good PB value” varies across industries.
In general, a good PEG ratio has a value lower than 1.0. PEG ratios greater than 1.0 are generally considered unfavorable, suggesting a stock is overvalued. Meanwhile, PEG ratios lower than 1.0 are considered better, indicating a stock is relatively undervalued.
But if the P/B ratio is less than 1, it suggests that the stock might be undervalued. Conversely, if the ratio is greater than 1, it indicates potential overvaluation. However, it's crucial to consider the industry and compare it with similar companies when interpreting the PB ratio.
A P/B ratio that's greater than one suggests that the stock price is trading at a premium to the company's book value. For example, if a company has a price-to-book value of three, it means that its stock is trading at three times its book value. As a result, the stock price could be overvalued relative to its assets.
Bank stocks tend to trade at prices below their book value per share as the prices consider the increased risks from a bank's trading activities. The price-to-book (P/B) ratio can be used to compare a company's market cap to its book value.
High PE can indicate high future growth expectations; low PE may suggest undervaluation. Low PB can suggest undervaluation, high PB may signal overvaluation or growth expectations. Can be influenced by non-operational factors and market sentiment. More stable, based on tangible book value of the company.
A PEG ratio of 1 is generally seen as ideal. It shows a balance between the stock's market value and expected earnings growth. A ratio above 1, suggests that the stock is overvalued, while a ratio below 1 signals undervaluation which is a buy opportunity.
Buffett's Strategy
Warren Buffett, the greatest value investor of this century, now tends to buy stocks with a P/B ratio of around 1.3.
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.
The price-to-book ratio is used by value investors to identify potential investments. P/B ratios under 1.0 are typically considered solid investments by value investors.
2. Is higher face value good or bad? Higher Face means, a higher net worth of the company, great prospects, and good dividend payouts, and thus it can be considered beneficial for the investors.
We can improve the P/B ratio by switching the denominator to tangible book value.
The PEG ratio offers deeper insights than a simple P/E ratio. A low PEG ratio suggests that a stock may be undervalued relative to its expected growth, while a higher PEG indicates potential overvaluation. As a general rule, a PEG ratio below 1.0 is considered attractive, suggesting that the stock might be a good buy.
Amazon.com (AMZN) PEG Ratio: 0.33
The peg ratio for Amazon.com (AMZN) stock is 0.33 as of Friday, January 10 2025. It's worsened by 38.64% from its 12-month average of 0.24. The peg ratio is calculated by taking the p/e ratio and dividing it by the eps growth over the past 12 months.
As a general rule of thumb, a stock with a PEG ratio of 1 is considered fairly valued. PEG ratios lower than 1 can indicate that a company's shares are undervalued, while ratios higher than 1 can indicate that they are overvalued.
The P/B ratio is favored by value investors for its usefulness in identifying undervalued companies. The average P/B ratio for banking firms, as of the first quarter of 2021, is approximately 1.28.
The lower a company's price-to-book ratio is, the better a value it generally is.
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
What if the PB ratio is less than 1? Ans: If the price-to-book value ratio is less than 1, it indicates that the company's stock might be undervalued. Undervalued stocks have better chances to increase in price in the future and value investors look for such stocks to invest and earn through capital appreciation.
Although banks appear a little overvalued at an industry level due to the dominance of JPMorgan Chase JPM (which accounts for 34% of the Morningstar US Banks Index), we continue to see value in smaller banks. This reflects the growing need to be selective when investing as prices rise.