The purpose of this page is to explain the indicator about appropriate stock price level among the indicators used in the analysis of companies and stocks.
Price book-value ratio (PBR) is the value obtained as the stock price devided by the book-value per share (BPS).
The same value can also be calculated as the market capitalization devided by the net assets.
PBR = Stock Price BPS = Market Capitalization Total number of issued shares × Total number of issued shares Net Assets = Market Capitalization Net Assets
The BPS in the denominator of the above formula corresponds to the asset value per share when the company is liquidated.
hence, PBR, which is the stock price divided by BPS, is an indicator showing how many times the stock price is relative to the asset value.
If the PBR is lower than 1, by acquiring and liquidating the company, the difference between liquidation price and acquisition price will be obtained as a profit.
Therefore, PBR is sometimes used as an indicator to judge the undervaluation of stock prices.
This idea is often appropriate when determining the bottom price of the entire market, such as the Nikkei Stock Average.
However, there is a problem in considering the PBR value as an indicator of overvaluation or undervaluation of individual stocks.
First, PBR less than 1 does not always mean that the stock price has been undervalued.
If the PBR is less than 1, it may indicate that the market has been expected the decrease of net assets of the company.
And if the net assets actually decrease, the stock price is a fair price and not undervalued.
In addition, PBR larger than 1 also does not always mean that the stock is overvalued.
Companies with high dividend payout ratios or companies that buy back their own shares and cancel treasury stock return much of their profits to investors.
Such companies show increase of ROE due to the large net income compared to the equity capital, and often are highly valued by the market.
That is, PBR is not an indicator of overvaluation or undervalu stocks unless you really acquire and liquidate a company.
However, paying attention to PBR is not worthless in investing.
As mentioned above, PBR of less than 1 indicates that the market has been expected the decrease of net assets of the company in the future.
it may indicate that the market has been expected the decrease of net assets of the company.
But, turning point can reach to any company.
For example, when the outlook for an industry as a whole is poor, PBR of any company in that industry may be less than one.
However, changes in the business environment can improve the profits of the industry as a whole.
Changes in interest rates affect the profits of the financial industry, and changes in exchange rates affect the profits of the manufacturing industry.
And, as net income increases, BPS also increses, so if the market is efficient, low PBR will be improved by rising stock prices.
Price Earnings Ratio (PER) is the value obtained as the stock price devided by the earnings per share (EPS).
It is also described as P / E ratio.
ref 1
Among several indicators for assessing whether a stock price is overvalued or undervalued, but PER is a simple indicator for assessing from the perspective of earnings.
The same value can also be calculated as the market capitalization devided by the net income.
PER = Stock Price EPS = Market Capitalization Total number of issued shares × Total number of issued shares Net Income = Market Capitalization Net Income
PER is the ratio of market capitalization to net income.
PER is a degree of the stock price relative to earnings, which make it possible to compare different companies, or to compare past stock prices of the same company.
However, since the degree is affected not only by the stock price but also by earnings, it is better to consider the average net income over multiple years when judging whether a stock is overvalued or undervalued.
Furthermore, keep in mind that a high or low PER does not always indicate whether a company is undervalued or overvalued.
This is because stock prices level relative to earnings may reflect investors' expectations of the company's future earnings.
Therefore, when judging whether the PER is high or low, it is also necessary to consider other factors, not just the PER alone.
Earnings Yield is the inverse of the PER.
Earnings Yield = 1 PER = EPS Stock Price = Net Income Market Capitalization
Earnings yield is a idea similar to interest rates in bonds.
Although PER is a guide of how many years the principal can be recovered, it is expressed as a yield by using the earnings yield.
For example, if the PER is 10 times and 20 times, the earnings yield will be 10% and 5%, respectively.
Earnings yield is mainly used to judge whether the stock index (Nikkei average, Topix, etc.) is overvalued or undervalued by comparing the earnings yield of the entire stock market with the interest rate of long-term government bonds.
ref 2
It is rarely used for individual stocks because low earnings yield (high PER) represent a high market evaluation of the company.
Price to Sales Ratio (PSR) is the value obtained as the market capitalization devided by the net sales.
PSR = Market Capitalization Net Sales
PER is useless for start-ups with growing sales and promising future, but no profit.
Therefore, in order to judge whether the stock price of such a company is overvalued or undervalued, PSR in which the denominator is changed from profit to sales is used.
For example, assuming that a company has a net profit margin of 10% for future sales and is already profitable, a PSR 10 now corresponds to a PER 100.
The stock price of PER 100 is overvalued in terms of current profits.
However, if net sales is growing steadily, the growth rate of profits is much higher than the growth rate of normal sales, so it is possible that the stock price is actually undervalued when profits will begin to appear.
EV / EBITDA is the multiple obtained as the EV devided by EBITDA.
EV is equivalent to the net acquisition price of the business, and EBITDA is equivalent to the cash flow generated by the business.
Therefore, EV / EBITDA indicates how many years after the acquisition of the business the acquisition cash can be recovered.
EV/EBITDA = EV EBITDA
EV / EBITDA is a concept similar to PER.
However, both the numerator and the denominator can be calculated based on cash flow, and it is possible to eliminate differences in market valuations and systems for each country, so it is more reliable as an indicator for investing.