What Is Price to Tangible Book Value (PTBV)?
The price to tangible book value (PTBV) is a valuation ratio expressing the price of a security compared to its hard, or tangible, book value as reported in the company's balance sheet. The tangible book value number is equal to the company's total book value less than the value of any intangible assets. Intangible assets can be such items as patents, intellectual property, goodwill, etc. The ratio is calculated as:
Understanding Price to Tangible Book Value (PTBV)
In theory, a stock's tangible book value per share represents the amount of money an investor would receive for each share if a company were to cease operations and liquidate all of its assets at the value recorded on the company's accounting books. As a rule of thumb, stocks that trade at higher price-to-tangible book value ratios have the potential to leave investors with greater share price losses than those that trade at lower ratios, since the tangible book value per share can reasonably be viewed as the lowest price at which a stock could trade.
PTBV is applicable mainly to industrial or capital-intensive companies that own a relatively high proportion of hard assets, as opposed to firms that engage in light manufacturing or service-oriented industries. PTBV is rather meaningless as a valuation measure in the technology sector, for instance, because much of a company's valuation derives from intellectual property, an intangible asset. An investor must also be careful with PTBV for companies that have long-held land. The land is stated at historical cost, not marked up each year on the balance sheet; therefore, PTBV can result in a deceivingly high ratio.
Example of Price to Tangible Book Value
At the end of 2016 tangible book value of General Motors was $37.81 billion (Total assets of $221.69 billion less $6.26 billion of goodwill and intangible assets less $177.62 billion in liabilities). 1.5 billion shares were outstanding, yielding a tangible book value per share of $25.21.The closing price per share of GM on the last day of 2016 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 with those of its peer group.