Beyond Book Value: Rethinking the Role of PB Ratio in Modern Business Valuation
Book value is an accounting metric, and its significance can vary depending on the market environment and the type of business. In long-bull markets like the United States, the book value of high-quality companies may decrease due to rising stock prices and stock buybacks, which could lead to an increase in the PB ratio. However, this does not necessarily reflect the true value of the enterprise.
Misconceptions about PB for Quality Enterprises: Even if the PB ratio is very high or even infinite, it cannot be used to simply judge the quality of a company. The judgment from a business logic perspective may not align with that from the book value perspective, and a more comprehensive analysis is needed.
PB Assessment in Light Asset Models: In light asset industries such as the internet, companies may not need a large amount of book assets to generate substantial profits. Therefore, a reasonable price-to-earnings ratio (PE) and a higher PB ratio may indicate that the company's business model has advantages, which could be the source of excess returns.
The Importance of Capital Efficiency: If a company can achieve high returns with a small capital investment, this is an advantage in itself. Relying solely on the PB ratio as a screening criterion may overlook this business logic.
Examples:
Amazon: As a typical light asset internet company, Amazon's book value may not be high, but its business model allows it to achieve high profits with a lower capital investment, which is reflected in its higher PB ratio. Amazon's success lies in its efficient use of capital and innovative business model, not just its book value.
Google: Alphabet, the parent company of Google, is also a light asset company. Its book value may decrease due to stock buybacks, but its powerful search engine and advertising business model enable it to continue generating high profits. Even with a high PB ratio, it does not affect its status as a high-quality investment target.
In summary, this passage emphasizes that when evaluating the value of a company, one should not rely too much on traditional financial indicators like the PB ratio. Instead, more consideration should be given to the company's business model, capital efficiency, and industry characteristics. In some cases, a high PB ratio may indeed be a reflection of the superior business model of the company.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
