anyone know why this ratio is used for banks?
book value --> the company’s net assets minus its outstanding debt. A Bank may have all its assets in investments that are easy to liquidate at current worth, so its book value will be very near the company’s actual value to investors…so P/B ratio is good measure… In contrast take an IT company…may have few tangible assets, so its book value may be low, making the price-to-book ratio seem very high… So p/B ratio is a good indicator for banks and not for Software company…
Price to book multiple is a prefered valuation metric for banks. This is because a bank needs to keep on raising fresh capital for future growth. There is a dilution effect from this. Hence one cannot project a banks earnings to perpetuity (and therfore not give a PE multiple). Apart from PBV also look at RoE for banks. ~Hopethishelps ~Rajat
varundarji, I’m not sure I agree, I don’t think all the assets on a banks balance sheet are going to be liquid.
Most assets and liabilities of banks are constantly valued at MARKET VALUES…so they can be easily valued…so the banks book value is very close to its actual value… Hope this helps
Yeah, Varundarji, you got it 100% right!
Ok so why is this a better measure than looking at earnings ratios i.e. EBITDA or P/CFLO?