Maybe 25%-33% of the time price/book is a completely worthless valuation method. Many companies have intellectual property that cannot be measured by book value. Many other companies have bought back so much stock, price/book becomes meaningless. The other 67%-75% of the time price/book is the best one number too measure Wall Street’s interest in a company. Wall Street loves companies with high ROE’s and hates those with low ROE’s. Companies with high ROE’s usually sell at high multiple of book value. This is despite the fact that economists have consistently proven that most companies with high ROE’s have that measure revert to slightly above the mean over 10-15 years. Companies with below average ROE’s typically have that measure almost get back to average over 10-15 years.
The Proper Use of Price/Book
The Proper Use of Price/Book
The Proper Use of Price/Book
Maybe 25%-33% of the time price/book is a completely worthless valuation method. Many companies have intellectual property that cannot be measured by book value. Many other companies have bought back so much stock, price/book becomes meaningless. The other 67%-75% of the time price/book is the best one number too measure Wall Street’s interest in a company. Wall Street loves companies with high ROE’s and hates those with low ROE’s. Companies with high ROE’s usually sell at high multiple of book value. This is despite the fact that economists have consistently proven that most companies with high ROE’s have that measure revert to slightly above the mean over 10-15 years. Companies with below average ROE’s typically have that measure almost get back to average over 10-15 years.