Definition

Mean Price to Book (PB) Value is a financial metric that compares a company's market value to its book value, averaged across a group of companies or over a period of time. It is used to assess whether a stock is undervalued or overvalued by comparing its market price to the value of its assets minus liabilities.

Formula

Mean PB Value = (Sum of PB Ratios of Companies) / (Number of Companies)

How to use the valuation method

To use the Mean PB Value for valuation, compare a company's PB ratio to the mean PB value of its industry or peer group. If a company's PB ratio is below the mean, it may be undervalued, suggesting a potential buying opportunity. Conversely, if it is above the mean, the company may be overvalued.

Which industries it work best in

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

Which industries it does not apply to and why

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

Summary

The Mean Price to Book Value is a useful tool for evaluating whether a stock is fairly valued by comparing its market price to its book value. It is most effective in asset-heavy industries but less applicable in sectors where intangible assets dominate.