ASE Technology, KB Home, Celestica, DXC Technology and Atlas Corp
The stocks in this week’s article are ASE Technology Holding Co., Ltd. ASX, KB Home KBH, Celestica Inc. CLS, DXC Technology Company DXC, and Atlas Corp. ATCO.
5 Low-priced Stocks to Book Value to Buy in December
The price-to-book (P / B) ratio is widely favored by value investors to identify low-priced stocks with exceptional returns. The ratio is used to compare the market value / price of a stock with its book value.
The P / B ratio is calculated as follows:
P / B ratio = market price per share / book value of share capital per share
The P / B ratio reflects how many times the book value investors are willing to pay for a share. So if the stock price is $ 10 and the stock’s book value is $ 5, investors are willing to pay twice the book value. Ideally, a P / B value below 1.0 is considered good, indicating a potentially undervalued stock. However, value investors typically consider stocks with a P / B value of less than 3.0.
The P / B ratio helps identify low-priced stocks that have high growth prospects. ASE technology, KB Home, Celestica, DXC technology and Atlas Corp. are some of those selections.
What is book value?
There are several ways to define book value. Book value is the total value that would remain, according to the company’s balance sheet, if it immediately declared bankruptcy. In other words, this is what shareholders would theoretically receive if a company liquidates all of its assets after liquidating all of its liabilities.
It is calculated by subtracting the total liabilities from the total assets of a company. In most cases, this equates to common equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets must also be subtracted from total assets to determine the book value.
Understanding the P / B ratio
By comparing the book value of stocks with their market price, we get an idea of whether a company is priced too low or too high. However, just like P / E or P / S ratio, it is always better to compare P / B ratios within industries.
An AP / B ratio of less than one means that the stock is trading below its book value, or that the stock is undervalued and therefore a good buy. In contrast, a stock with a ratio greater than one can be interpreted as overvalued or relatively expensive.
For example, a stock with a P / B ratio of 2 means that we pay $ 2 for every $ 1 of book value. Therefore, the higher the P / B, the more expensive the share will be.
But there is a caveat. An AP / B ratio of less than one can also mean that the company is earning weak or even negative returns on its assets or that the assets are overstated, in which case stocks should be avoided because they may be destroying shareholder value. Conversely, the share price can be significantly high, pushing the P / B ratio higher than one, in the likely event that it has become an acquisition target – reason enough to own the stock.
Furthermore, the P / B ratio is not without limitations. It is useful for businesses, such as finance, investment, insurance, and banking or manufacturing companies, with a lot of liquid / tangible assets on the books. However, it can be misleading for companies with significant R&D spending, high debt, service companies, or those with negative revenues.
In any case, the relationship is not particularly relevant as an independent number. Other relationships such as P / E, P / S, and debt to equity should be analyzed before reaching a reasonable investment decision.
For the rest of this article on Screen of the Week, visit Zacks.com at: https://www.zacks.com/stock/news/1836176/5-low-price-to-book-value-stocks-to-buy-in-december
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