What is price versus tangible book value (PTBV)?
The price compared to the tangible book value (PTBV) is an evaluation report expressing the price of a security compared to its material, or tangible book value, as declared in the balance sheet of the company. The number of tangible book value is equal to the total book value of the company less than the value of intangible assets. Intangible assets can be items such as patents, intellectual property, goodwill, etc. The ratio is calculated as follows:
Understanding the price in relation to the tangible book value (PTBV)
In theory, the tangible book value of a share per share represents the amount of money an investor would receive for each share if a business were to cease operations and liquidate all of its assets at the value recorded in the books of the business. In general, stocks that trade at higher tangible book value ratios can leave investors with greater price losses than stocks that trade at lower ratios, since tangible book value per share can reasonably be considered to be the lowest price at which a security could trade.
The PTBV applies mainly to industrial or capital-intensive enterprises that hold a relatively high proportion of material assets, as opposed to enterprises that engage in light or service-oriented manufacturing industries. PTBV does not make sense as a measure of valuation in the technology sector, for example, because much of the valuation of a business stems from intellectual property, an intangible asset. An investor should also be careful with PTBV for companies that have long standing land. The land is indicated at historical cost, not increased each year on the balance sheet; therefore, PTBV can lead to a deceptively high ratio.
Example of price in relation to tangible book value
At the end of 2020, General Motors’ tangible book value was $ 37.81 billion (total assets of $ 221.69 billion minus $ 6.26 billion of goodwill and intangible assets less $ 177.62 billion liabilities). 1.5 billion shares were outstanding, giving a tangible book value per share of $ 25.21. GM’s closing share price on the last day of 2020 was $ 34.84. Therefore, PTBV was $ 34.84 / $ 25.21, or 1.38. An analyst could study the trend of this ratio or compare it to those of his peer group.