Want to pick stocks based on price-to-book ratio but keep falling into traps? This investment guide will help you avoid detours.

Many investors frequently mention a metric when selecting stocks—the price-to-book ratio—believing it is the key to determining whether a stock is cheap. However, blindly trusting the price-to-book ratio can easily lead to stock picking traps. So, how should this indicator be correctly used?

The Core Meaning of Price-to-Book Ratio: A True Reflection of Asset Value

The price-to-book ratio (Net Asset Value per Share, NAVPS) essentially represents the net asset value attributable to each share. In simple terms, it indicates how much company assets are backing each share you hold.

From an accounting perspective, a company’s net assets equal its total assets minus liabilities. For example: suppose a company has total assets of NT$2.5 billion, liabilities of NT$1 billion, and 1 billion shares outstanding. Then, the net asset value per share = (2.5 billion - 1 billion) ÷ 1 billion = NT$1.5.

This figure reflects the actual wealth per share at the current moment. But it’s important to note that a high price-to-book ratio does not necessarily mean the stock is worth buying.

Price-to-Book Ratio (PBR): A Powerful Tool for Valuation

To judge whether a stock is cheap relative to its net assets, the price-to-book ratio is used.

The calculation is straightforward: PBR = Market Price per Share ÷ Book Value per Share

A lower ratio generally indicates a cheaper stock; a higher ratio suggests a more expensive one. But there is a misconception to clarify—a low PBR does not automatically mean the stock is a good investment.

Why? Because the PBR only shows how cheap the stock appears relative to its net assets, but it cannot reflect the company’s profitability or growth prospects. A company with a continuously declining PBR might be experiencing market sell-offs due to deteriorating operations or industry decline.

Industry Comparison Is the Correct Approach

The true value of the PBR lies in horizontal comparison within the same industry.

For example, in the financial sector, JPMorgan Chase’s PBR is about 1.94, Ford about 1.19, and General Electric only 0.70. But these numbers are not comparable across different industries.

Cyclical stocks (like shipping, steel, oil) and financial insurance companies are heavily influenced by macroeconomic factors, leading to wider fluctuations in PBR. Conversely, tech and consumer companies that rely on intangible assets and innovation often have low net asset values but strong profitability, making them more worth attention.

Price-to-Book vs. Earnings per Share: Two Investment Perspectives

Many investors tend to confuse these two concepts.

Earnings per Share (EPS) focus on profitability—it shows how much profit the company generates for each share. This is especially important for growth-oriented companies.

Book value per share emphasizes asset base—it reflects how many hard assets the company owns. This is significant for asset-heavy industries like manufacturing and real estate.

A company might have large assets but thin profits, or vice versa. When evaluating investment value, it’s best to combine both indicators:

• Value investors focus on stocks with low PBR, seeking undervalued assets.
• Growth investors pay attention to EPS growth rates, seeking future profit potential.

Practical Stock Picking: Correct Application of the Price-to-Book Ratio

Step 1: Industry Screening
Different industries have different PBR benchmarks. For example, it’s normal for capital-intensive industries like Formosa Plastics (PBR around 2.45) to have relatively low PBRs, while tech stocks like TSMC (PBR around 4.29) may have higher ratios.

Step 2: Longitudinal Comparison
Compare the same stock’s historical PBR. If a stock’s PBR has typically been between 1.6 and 2.5, and now it drops to 1.2, there might be an undervaluation. Conversely, if it continues to decline below 0.8, it warrants caution about a potential downturn.

Step 3: Combine with Other Indicators
Relying solely on PBR is insufficient. It’s also necessary to examine profit growth, cash flow, debt levels, and industry health.

Common Pitfalls: Misusing the Price-to-Book Ratio

Pitfall 1: Focusing only on numbers without understanding the reasons
Changes in PBR can result from operational changes or capital actions like issuing new shares or stock dividends. These situations have very different implications and should not be confused.

Pitfall 2: High net asset value equals a good company
Internet and emerging tech companies often have low or even negative per-share net assets, but this does not mean they are not worth investing in. The key is whether they can sustain profit generation.

Pitfall 3: Ignoring industry differences
Different industries have vastly different business models and capital structures. Comparing PBR across industries is invalid—manufacturing and software companies have entirely different valuation logic.

Practical Inquiry Methods

Most trading platforms and stock websites provide direct PBR data—just input the stock code. For manual calculation, extract net assets and share count from annual reports and apply the formula.

Overall Understanding

The price-to-book ratio is an important tool for understanding stock valuation, but it is not the sole criterion for stock selection. It’s most suitable for value investing and industry comparison, helping to identify undervalued assets. However, treating it as a universal stock-picking formula can lead to pitfalls.

The ideal approach is: first, use PBR to filter relatively cheap stocks; then, analyze with multiple indicators like EPS, cash flow, and growth potential before making an investment decision.