Valuation indicators (5/9)

The price/book value ratio

Le ratio prix / valeur comptable (price to book en anglais) est moins connu que les deux précédents, mais il a néanmoins la cote auprès d'un nombre assez important d'investisseurs orientés valeur. Ce ratio mesure le rapport entre le prix d'une action et la valeur comptable par action. Le mérite de la valeur comptable c'est qu'elle est plus stable dans le temps que les bénéfices et qu'il est (un peu) plus difficile de la manipuler. Cela permet aussi de mesurer la valeur d'une société qui ferait temporairement des pertes (dans ce cas typiquement le PER est inutile). De plus le ratio prix / valeur comptable fonctionne bien, quelle que soit la taille de l'entreprise.

With this ratio we are right in the school of Benjamin Graham, whose merits are no longer in doubt. The various studies carried out on the effectiveness of the price/book value ratio all conclude that it is effective, but with different results:

• Some claim that this is the best ratio in all cases.
• others claim that it is a very good ratio in the long term but can suffer from long periods of inefficiency.
• others point out that it is a good indicator but that it carries the risk of insolvency, especially for companies with the lowest price/VC ratios (so in this case it is absolutely appropriate to expand the analysis, but who doesn't?)
• Others finally stipulate that this ratio was effective during the 20th century, but that since the Internet era the value of companies is measured more by their intangible resources than by their accounting value, and therefore this ratio would no longer be effective.

Fashions come and go. I believe that a company's book value is far from dead. It is currently struggling because the market is breaking new records, and denigrating it is just an excuse to justify the irrational levels of the market. On the contrary, I think that, as a safety margin, it is even appropriate to completely remove the intangible value of a company from its book value. I am therefore interested in its tangible book value, which only includes its tangible assets. From there, I calculate my price / tangible book value ratio. If it is less than 1.5, there is a chance that the company is a good opportunity. We must then push the analysis a little further to determine whether the company is unfairly shunned by investors, or whether it is for good reasons, namely financial difficulties.

Benjamin Graham went even further in some cases, looking at the value of net current assets relative to price, or even net working capital (i.e. mainly cash reserves) relative to price. These are the famous NCAV and NNWC strategies with which he had some success and which are still somewhat in vogue among some value-oriented investors. The problem with these so-called "cigar butt" approaches is that not only are they very volatile, and therefore you have to have strong enough nerves to hang on to them, but above all, the stocks that are currently likely to be selected are almost non-existent. But if you find some and stick with it, it can be very lucrative.