Definition

The Median Price to Book (PB) Ratio is a financial metric used to compare a company's market value to its book value, with the median value representing the middle point of PB ratios within a specific group of companies or an industry.

Formula

PB Ratio = Market Price per Share / Book Value per Share

How to use the valuation method

The Median PB Ratio is used to assess whether a stock is undervalued or overvalued compared to its peers. A PB ratio below the median may indicate undervaluation, while a ratio above the median may suggest overvaluation. Investors use this metric to make informed decisions about buying or selling stocks.

Which industries it work best in

The Median PB Ratio works best in industries with significant tangible assets, such as manufacturing, utilities, and financial services, where book values are more reflective of the company's actual worth.

Which industries it does not apply to and why

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

Summary

The Median Price to Book Ratio is a useful tool for evaluating stock valuations relative to industry peers, particularly in asset-heavy industries. However, it may not be as effective in sectors where intangible assets play a significant role in determining company value.