The goal in investing is to pay less than what a business is worth. One way investors attempt to do that is investing in stocks trading below book value. Strictly speaking, book value is defined as the net worth of a company. Deduct a company's liabilities from its assets and what you are left with is "net assets" also referred to as equity or book value. While such an investment approach is simplistic and not a guaranteed recipe for investment success, it does offer a lot of promise.

Tutorial: Ratio Analysis

Good Assets
The largest steel company in the world, Arcelor Mittal (NYSE:MT), currently trades at a price to book ratio of 0.90. While MT has intangible assets and goodwill on the balance sheet, as the largest steel company on the planet those intangibles clearly have value. Profits are expected to surge over the next year as shares sport a forward P/E ratio of less than 9. Another titan in its industry is cement company Cemex (NYSE:CX). Shares trade for $9 and the P/B ratio is 0.55. Cemex is highly levered, however, with a market cap of $9 billion and an enterprise value of $26 billion. Operations have been hurt by a weak infrastructure market, but earnings could spike quickly as a result of the leverage.

Fallen Giants
Names that used to be market darlings now find themselves trading wide discounts to book. Bank of America (NYSE:BAC) is one such company that trades at 60% of book value. The only problem is that no one really knows the true book value for BAC since it still sits on troubled loans. At the same time, it's likely that current loans are of much better quality, and this should bolster earnings over time.

Considered one of Japan's iconic companies, Sony Corp (NYSE:SNE) now trades for $29 a share versus book value of nearly $36. More so, Sony has a solid balance sheet showing $17 billion in cash versus $12.5 billion in debt. The company is launching two new tablet computers in its efforts to benefit from the surge in demand from this new product category. (For more, see Do Tablet Wars Signal Apple's Decline?)

Book Value Trap
Investing in names below book value is not a bulletproof approach. But it can present some ideas especially for a company with solid cash generating assets. (For more, see our Understanding Book Value Video.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  6. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  7. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!