Definition

The Mean Price to Book (PB) Ratio is a financial metric that compares a company's market value to its book value, averaged over a specific period. It helps investors assess whether a stock is overvalued or undervalued relative to its historical performance.

Formula

Mean PB Ratio = (Sum of PB Ratios over a period) / (Number of periods)

How to use the valuation method

Investors use the Mean PB Ratio to evaluate a company's valuation over time. By comparing the current PB ratio to its historical mean, investors can determine if the stock is trading at a premium or discount. A PB ratio below the mean may indicate undervaluation, while a ratio above the mean may suggest overvaluation.

Which industries it work best in

The Mean PB Ratio works best in industries with significant tangible assets, such as manufacturing, utilities, and financial services, where book value is a reliable indicator of a company's intrinsic value.

Which industries it does not apply to and why

The Mean PB Ratio is less applicable to industries with high intangible assets, such as technology and pharmaceuticals, because book value may not accurately reflect the company's true value due to the importance of intellectual property and R&D.

Summary

The Mean Price to Book Ratio is a useful tool for assessing a company's valuation relative to its historical performance, particularly in asset-heavy industries. However, it may not be as effective in sectors where intangible assets play a significant role in value creation.