Friday, May 4, 2018

Unusually Fine Advanced PBV Analysis

When valuing financial service firms, the Price to Book Value (PBV) ratio is possibly the most commonly used valuation method by analysts because it's safe, simple, has a strong historical basis and requires no IQ at all.

Back testing the PBVs to stock price has a good correlation. PBV needs however be looked at in the context of return on equity (ROE). Historical analysis has shown that ROE has a strong impact on banks’ value creation in the long run. Bottom line: Firms that have high price-book value ratios should also have high returns on equity. Firms that have low price-book value ratios should have low returns on equity.