Buying stocks using P/B Ratio

This is a continuation of my earlier blog post. What happens when I bring in Price to Book ratio (P/B) into my investment decisions?

Price to Book ratio is Stock Price divided by Net Assets of the company. Net Assets amount of a company is the same as Shareholders’ Funds in the balance sheet of the company. Shareholders’ Funds belong to the shareholders ultimately when the company exits from the business completely. The amount that a shareholder is willing to pay for its stock should be compared with the Net Assets of the company. The more he pays above the Net Assets is considered premium on purchase. Conversely, the less he pays than the Net Assets is considered discount on purchase. The P/B ratio shows that comparison.

Generally speaking, when investor buys a stock with low P/B:
i. Investor is not overpaying for a stock.
ii. It has a chance that stock price could rise higher in a longer term (on condition that the business continues to operate profitably).
iii. Should there be a breakup of the business, investor did not overpay to recover net assets of the company.

The following table shows the P/B for some select stocks sorted from lowest P/B to the highest. The P/E and Dividend Yield are included for additional decision parameters.

Stock as at 31 Dec 2014 Stock Price P/B P/E Div Yield
Keppel Land 3.42 0.756 6.00 3.80
UOL 6.96 0.821 6.80 2.90
CapitaLand 3.31 0.875 16.60 2.40
SIA 11.60 1.047 37.90 4.00
City Dev 10.27 1.211 13.90 0.80
DBS 20.60 1.492 13.70 2.80
SBS Transit 1.705 1.517 33.31 1.27
SembCorp Ind 4.45 1.524 9.70 3.80
UOB 24.53 1.548 13.30 3.10
Keppel Corp 8.85 1.660 8.70 5.60
OCBC 10.46 1.768 13.80 3.30
SPH 4.21 1.829 16.80 5.00
SATS 3.05 2.428 18.90 4.30
SembCorp Marine 3.26 2.568 12.30 4.00
Sing Tel 3.90 2.598 17.00 4.30
Comfort Delgro 2.60 2.601 20.90 2.70
SMRT 1.580 3.047 38.50 1.40
Raffles Medical 3.89 4.680 25.20 1.30
SingPost 1.92 5.952 28.40 3.30
M1 3.61 8.580 20.70 5.80
SGX 7.81 8.995 24.80 3.60
StarHub 4.15 86.629 19.30 4.80

Important notes: P/B ratios were extracted from Clarity of DBS Vickers. The book values are based on latest full year financial statements that could be one year old (since 31 December 2014 accounts are not available yet for most companies).

No surprises that property developers were trading at low P/B ratio. P/B ratios for Keppel Land, UOL and CapitaLand are below 1.0. Property counters were beaten down significantly because of the cooling property markets. I have avoided making a call for property developers. I am not sure of this sector for 2015.

SIA was trading at 1.047 P/B. However. P/E was 37.90.

Comparing the P/B of three local banks:
DBS                1.492
UOB                1.548
OCBC            1.768

DBS has the lowest P/B among them.

As investor, one has to understand the business of each stock and the prospects of these companies in delivering the earnings before he uses P/B ratio, P/E ratio and Dividend Yield to make buy/sell decisions.

As in any investment advice, please engage buy/sell decision with caution. The entry stock price and exit stock price are matter for careful consideration.

Copyright © 2015, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

This entry was posted in Financial Management and tagged . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s