Many analyst reports cite the
price-to-book ratio, which compares the price of a share to its
book value, which is the company's net assets minus its
outstanding debt. You'll often see this multiple cited on the
first page of a report, along with other major measures of stock
valuation. Book value is supposed to represent the value per share
if, today, the company shut down operations, paid off its debts,
and its assets were sold off. As such, the usefulness of book
value depends significantly on the industry.
A software company, for example, may have few
tangible assets, so its book value may be low, making the price-to-book
ratio seem very high. Meanwhile, a bank may have all its assets
in investments that are easy to liquidate at current worth, so
its book value will be very near the company's actual value to
investors. Today, many companies might seem vastly overpriced
if evaluated only on their book value, since they lack tangible
assets, even if they produce valuable services or products. Furthermore,
a company's profitability depends on the usefulness of its assets:
$1 million of outdated inventory is a significantly different
asset than $1 million of the latest model.
So even though the price-to-book ratio may get
front-page attention on an analyst report, its significance in
the report depends on the company and industry.
Debt-to-equity
Book value addresses an important factor in company
valuation: debt. Analysts also examine the role of debt in book
value through a ratio called
debt-to-equity,
which is the book value divided by the debt. If the analyst feels
the company is carrying too much debt, it could affect the recommendation.
Sam Stovall,
Chief Investment Strategist at Standard & Poor’s
Sam Stovall, 
