At the end of book 4 in the Schweser notes, in the Intro to Price Multiples section, it states that P/BV is good to use for companies like banks. Why is this true?
lillilland, one challenge in analyzing businesses that own a lot of physical assets is that the book values of these assets likely don’t reflect their true market values. This is because their book values are based on historical cost, less depreciation and possibly even impairment. However, banks hold a great deal of financial assets, many of which are carried on the balance sheet at market value. So for these types of companies, their book values are more aligned with actual market value. You’ll learn more about accounting for investments in financial assets at LII.
Thanks for the clarification hiredguns. So, P/BV, refers to the book value of the assets and not book value of the equity, right? Hope that’s not a silly question.
here’s a definition courtesy of CFAI: “Book value of equity (or book value): Shareholder’s equity (total assets - total liabilities) minus the value of preferred stock; common shareholders’ equity; book value per share is book value of equity divided by the number of common shares outstanding.” The point I was making is that it would be optimal to use the market value of total assets and total liabilities in deriving this value, which, for firms with a lot of property, plant & equipment, (and/or other assets not recorded at market value) would require some work to estimate.