The PB ratio
There are several metrics to value a business, and the PB (price-to-book-value) ratio is one of the most basic methods. The PB ratio tells us how a company is valued in comparison to its book value.
What these numbers mean
Analysts see a PB ratio of less than 1.0x as a sign of a stock’s undervaluation. As such, ArcelorMittal looks undervalued, while AK Steel (AKS) looks quite expensive. But we can’t always draw such simplistic conclusions.
For instance, AK Steel has negative shareholder equity due to accumulated losses. While AK Steel’s book value per share is expected to rise, its book value is now negative.
Although PB ratios provide us some insight into a company’s valuation, it’s important to read them in conjunction with other ratios—especially those related to income statements.
In the next part, we’ll do a comparative analysis of steel companies’ PS (price-to-sales) ratios.