was going through some Q-bank and they asked what metric would be most appropriate to value a financial firm, P/B, P/S, or dvd yld. they stated correct answer was P/B, yet a few questions prior mentioned P/B not good metric for a service oriented cos, not much in way of physical assets. thanks, John
financial firms have investments on their books. investments in bonds, etc. and their liabilities are often deposits (customer deposits). hence P/B is appropriate, and ROE is good measure for their profitability. not cash flow per se.
and what types of firms would P/B be INAPPROPRIATE for?
P/B is a good measure for firms where most of the assets are marked at fair value - this is why a financial firms like banks are most suited for P/B valuation. All other firms where a lot of the value is intangible and its assets are not captured at fair value make for poor candidates for P/B analysis
AndrewUNH Wrote: ------------------------------------------------------- > and what types of firms would P/B be INAPPROPRIATE > for? Anything w/ a lot of intangible value or service oriented businesses (human capital). You would never do a P/B ratio on Google, because all their value is in the IP of their software for the search engine, etc. You would never do a P/B ratio on a firm like WPP (largest advertising firm in the world), law firms, or a recruiter/consulting firm like Heidrick Struggles (largest headhunter/recruiter globally). Both businesses rely entirely on the margins you are making (what you bill per hour vs. what you pay your employees per hour). The P/B of your assets is meaningless. P/B can be inappropriate for some other firms depending on the circumstances. You basically have to know the business in the first place, though.