Financial Ratios

Financial Ratios

Price to Book Value (P/BV) Ratio

Before we understand the Price to Book Value ratio, we need to understand what the term ‘BookValue’ means. Consider a situation where the company has to close down its business and liquidate all its assets.What is the minimum value the 

company receives upon liquidation? The answer to this liesin the “Book Value” of the firm.The “Book Value” of a firm is simply the amount of money left on table after the company pays off its obligations. Consider the book value as the salvage value of the company. Suppose the bookvalue of a company is Rs.200 Crs, then this is the amount of money the company can expect to receiveafter it sells everything and settles its debts. Usually the book value is expressed on a pershare basis. For example, if the book value per share is Rs.60, then Rs.60 per share is what the shareholder can expect in case the company decides to liquidate. The ‘Book Value’ (BV) can be calculated as follows:

BV = [Share Capital + Reserves (excluding revaluation 

reserves) / Total Number of shares]