1 key figure that reveals more about a stock than many will admit!

One metric that reveals more about a stock than many want to admit is its price-to-book (P/B) ratio. It can be determined by dividing the current price by the book value per Simply put, the book value per equity of the share balance divided by the number of outstanding shares.

A price-to-book ratio of less than one means that the share is traded for less on the stock exchange than the balance sheet shows.

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Value investors look for low P/Es

Value investors often like to look at this metric because it suggests that the stock is undervalued under optimal conditions. However, you need to look more closely at the details.

Sometimes there are good reasons why a stock trades below its equity value. Investors often expect declining sales and profits, sometimes even losses. Unplanned depreciation can also have a greater impact on earnings than previously.

These are just a few examples that can be found on the risk side. My experience tells me that stocks with extremely low price-to-book ratios should be treated with great caution. A few prominent names can also be mentioned here. E.g German bank (WKN: 514000). It is currently available for about a third of its expected book value.

Deutsche Bank is no exception in the banking sector, and large systemically important banks from the US such as Citigroup are also traded at a large discount to their equity capital. Both stocks are considered restructuring stocks or turnaround candidates.

These are shares that have had operating problems for a long time. At both companies they have not been resolved to this day. At least there is hope that it will happen in the future. Warren Buffett is also betting on a comeback from Citigroup.

High profits are in prospect

If investors are successful in their efforts, there may be the prospect of high profits. If you just look at Deutsche Bank, a rate level of around 30 euros could soon be possible again, which would correspond to a tripling of the rate.

Another industry that often hosts stocks at significant discounts to reported equity is the telecommunications sector. It is actually a very defensive sector. It has many stocks that give big dividends year after year. At the same time, many of them have a monopoly-like position.

The main problems, however, are the high capital intensity and the strong regulation. The telecommunications networks must be brought up to a faster standard, which swallows billions of euros. At the same time, price increases are only possible within very narrow limits. The current high level of inflation and rising interest rates are increasingly becoming a burden on the entire telecommunications industry.

Price-to-book ratio: A good measure to start with

The low price-to-book ratio reflects this very fact. There appears to be no prospect of success for the time being. This is precisely the truth that many investors refuse to accept.

Sometimes it is better to leave a cheap stock with a low price-to-book ratio and focus on higher growth stocks.

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Frank Seehawer owns none of the shares mentioned. The Motley Fool does not own any of the stocks listed.

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