P/BV

CFA Level II
#1

Why P/BV not mean much for firms without significant fixed costs?

thanks

The disadvantages of using PBV ratios are:

  1. Book values are affected by accounting standards, which may vary across firms and countries.
  2. Book value may not mean much for service firms without significant fixed costs.
  3. Book value of equity can be made negative by a series of negative earnings, which limits the usefulness of the variable.
#2

Well it just means for service industry there is no such thing as land, building or inventory. Most of the profit generating assets are people. Thus two service firm with the same land and building. Well have a similar ratio. One could have like 500 lawyers while the other one could have only 200 lawyers. They could same number of lawyers, but one firm could have big time lawyers (higher margin, more revenue).

P/BV is comparing price of the stock to it’s asset. Service firm’s main revenue generating assets (humans) are not included on a balance sheet, so it’s useless to use it for service firm.

#3
  1. Book value of equity can be made negative by a series of negative earnings, which limits the usefulness of the variable.

I would love to see a real example of this out of the 20k stocks that we have in the U.S./Canada!! Has anyone come across such thing?

#4

what I don’t undertand is that BV is related to the book value of the Stock in the Equity part of the balance sheet why deal with fixed assets ?

#5

… because the equity value is all the assets (which is typically large for companies with big fixed assets like land, property and equipment) minus all the liabilities.

#6

so to find the BV , Total assets - liability? but I still think that BV here refers to the BV of the common stock equity.