By Dave Burt, CPA - Dear Keegan Wilson
You can get a good explanation of price-to –book ratio or price-to-earnings multiples from many sources (See: http://en.wikipedia.org/wiki/P/B_ratio).
However, to me the value in these ratios is historical only. What has happened? What was management lucky enough to do? What did the stock market trip over itself and rationally do or not do? Which micro-brained, till dipped politician spooned with whose soft money?
While a nice little exercise in simple math, once calculated, it is no value outside the exercise itself. If you buy stock based on one company’s P/B ratio over another, good luck, fella. Even if they are in the same industry, that means they are more comparable but of no more value. Once you got the calculation down, move on. The future, haven’t you heard, can’t repeat itself.