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What Is Price to Tangible Book Value (PTBV)?
Price to tangible book value (PTBV) is a valuation ratio used to compare the price of a security to the company's physical assets as reported in its balance sheet.
The tangible book value number includes all physical assets but excludes intangible assets such as goodwill, patents, intellectual property, and trademarks. Since intangibles are excluded, PTBV is considered a more accurate estimate of the company's net value to shareholders, after debts are paid, in the event of liquidation.
Key Takeaways
- Price to tangible book value (PTBV) measures a company's market value relative to its hard or tangible assets.
- The tangible book value number includes all of a company's physical assets such as its inventory, equipment, and real estate.
- In theory, a stock's tangible book value per share represents the amount of money an investor could receive for each share of stock if a company were to cease operations and liquidate all of its assets.
- Stocks that trade at higher PTBV ratios have the potential to leave investors with greater share price losses than those that trade at lower ratios.
- PTBV is applicable mainly to industrial or capital-intensive companies that own substantial hard assets.
Understanding Price to Tangible Book Value (PTBV)
A company's tangible assets are the things of value that it owns. Examples include machinery, equipment, raw materials, inventories, vehicles, and buildings.
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. In fact, in the event of a liquidation, common stock shareholders are last in line to be repaid, after all of the company's creditors.
As a rule of thumb, stocks that trade at higher PTBV 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.
The PTBV Formula
PTBV = Share Price / Tangible Book Value Per Share
Where:
- Share price is the current market price per share of stock.
- Tangible Book Value Per Share (TBVPS) is equal to total tangible net assets divided by the total number of shares outstanding.
When to Use Price to Tangible Book Value
PTBV is applicable mainly to industrial or capital-intensive companies like auto manufacturers and oil refiners. These companies have hard assets of high value.
PTBV is relatively meaningless as a valuation measure in the technology sector, for instance, because much of a tech company's valuation derives from its intellectual property, an intangible asset.
Calculating PTBV can be tricky in some instances, such as for companies that have land that has been held for decades. The land is stated on the books at its historical cost, not marked up each year on the balance sheet, resulting in a deceptively high PTBV ratio.
Example of Price to Tangible Book Value
As of the quarter ending June 30, 2023, the tangible book value of General Motors was about $71 billion (total net assets of $276 billion less $5 billion of goodwill and intangible assets minus about $200 billion in liabilities).
There were $1.4 billion shares outstanding, yielding a tangible book value per share of about $50.7
The closing price per share of GM on the last day of 2020 was $38.56. Therefore, PTBV was $71/$50.7, or $1.4.
An analyst could study the trend of this ratio or compare it with those of its peer group.
How Does PTBV Differ From Price-to-Book (P/B)?
PTBV and price-to-book are nearly identical, except P/B includes the value of all assets, including intangible assets. PTBV excludes intangible assets such as intellectual property and goodwill.
When Is PTBV Most Useful?
Many of today's public companies derive most of their value from intangible assets and may not have very many tangible assets on their balance sheet. Thus, PTBV is not a reasonable way to measure the company's value.
PTBV is most useful when evaluating capital-intensive companies that rely on hard assets, such as manufacturers or mining companies.
What Does PTBV Represent?
PTBV represents the market value of a company's shares as a multiple against the amount it would receive if it was forced to sell off all of its hard assets.
The Bottom Line
Price to tangible book value (PTBV) is one of many calculations that analysts may use in an effort to pinpoint the fair value of a public company's stock.
It is not particularly relevant to some companies, such as today's technology giants, because their true value lies in their intangible assets such as their intellectual property and patents.
It is more relevant when considering a manufacturer such as General Motors, or any company that relies heavily on its investments in machinery, equipment, or buildings.
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