What is a reasonable price-to-book ratio? From net asset value per share to practical stock selection

Why Should We Pay Attention to Book Value per Share? Asset Valuation Investors Must Understand

Many stock investors get overwhelmed by various complex financial indicators when selecting stocks, among which “Net Asset Value per Share” (NAVPS) is a commonly overlooked but crucial reference metric. Simply put, NAVPS represents the true asset value of the company attributable to each share.

Imagine you and a friend co-own a coffee shop, investing a total of 5 million yuan to buy equipment and rent the store, with a bank loan of 2 million yuan. Your actual net assets are 3 million yuan. If the store is divided into 100,000 shares, each share represents an asset value of 30 yuan. This is the core concept of NAVPS—it reflects the asset value that shareholders would theoretically receive upon liquidation.

How to Calculate NAVPS? Master Three Methods

The most straightforward formula is:

NAVPS = Shareholders’ Equity / Total Outstanding Shares = (Total Assets - Total Liabilities) / Total Shares Outstanding

Or from an accounting perspective:

NAVPS = (Share Capital + Capital Surplus + Retained Earnings + Unappropriated Profits) / Total Shares Outstanding

For example, using Uni-President’s data: assume total assets are 2.5 billion yuan, total liabilities are 1 billion yuan, and total shares outstanding are 1 billion shares. Then NAVPS = (2.5 - 1) / 1 = 1.5 yuan.

Using another set of financial data: share capital 700 million yuan, capital surplus 400 million yuan, retained earnings 300 million yuan, unappropriated profits 100 million yuan, and 1 billion shares outstanding, the calculation also yields (700M + 400M + 300M + 100M) / 1B = 1.5 yuan.

The key point is: the higher the NAVPS, the more solid the company’s actual assets are, and the stronger its risk resistance. But this does not necessarily mean the stock price will be high.

What is a Reasonable Price-to-Book Ratio (PBR)? The Golden Standard for Stock Selection

Here, we introduce a practical investment indicator—the Price-to-Book Ratio (PBR):

PBR = Market Price per Share / NAVPS

Judging PBR:

• PBR < 1: Stock price below net asset value, possibly undervalued, but beware of hidden operational issues
• PBR 1-2: Reasonable valuation range, with good safety margin
• PBR 2-3: Moderate premium, indicating market expectations for future growth
• PBR > 3: High premium, potential valuation bubble

However, there’s a misconception to clarify: a low PBR does not automatically mean the stock is a good buy.

Imagine a factory with poor management, and its stock price drops below NAV, with a PBR of only 0.8. But if the company is losing money and debts are increasing, this low ratio actually signals market concerns. Conversely, a stable, rapidly growing tech company might have a PBR of 4-5, yet investors are willing to pay a premium because they see future growth potential.

When is a High or Low NAVPS a Good Investment Signal?

Best when compared within the same industry

Different industries have vastly different standards for PBR. Here are some reference ranges:

Traditional Heavy Asset Industries (Steel, Shipping, Cement, Real Estate)

• Rely on land, factories, equipment for profit; net asset ratio is significant
• Reasonable PBR typically between 1-2
• For example, Ford (F) has a PBR of about 1.19, General Electric (GE) about 0.70, both relatively inexpensive

Financial Companies (Banks, Insurance)

• Large proportion of assets are cash and securities
• Reasonable PBR usually between 1-1.5
• For example, JPMorgan Chase (JPM) PBR around 1.94, within acceptable range

Light Asset, Tech Companies (Software, Internet, Semiconductor Design)

• True value lies in talent, technology, user base, not on book assets
• Reasonable PBR can be 3-8 times or higher
• For example, NVIDIA (NVDA), Netflix (NFLX), Microsoft (MSFT); even with high PBR, investment value remains

Use time-series comparison to identify turning points

A more practical approach is to compare the same stock’s historical PBR. For instance, if a stock’s PBR has been stable around 1.8-2.2 for a year but suddenly drops to 1.2, it might be a buying opportunity. Conversely, if the PBR has been declining from 2.5 to 1.8 and then to 1.2, it warrants caution—this usually indicates market expectations are being lowered.

Recommended Stocks in Taiwan and US Markets: Reasonable PBR and Quality Stocks

Taiwan Stocks

1. TSMC (2330)

• PBR: approximately 4.29
• Valuation interpretation: Despite high PBR, TSMC is the global leader in wafer manufacturing, with steady profit growth, continuously increasing net assets. The high ratio reflects market recognition of its competitive advantage.

2. Formosa Plastics (6505)

• PBR: approximately 2.45
• Valuation interpretation: As Taiwan’s largest plastics manufacturer, with upstream raw material control and stable profits, its PBR is moderate, offering a good safety margin.

3. Taiwan Mobile (3045)

• PBR: approximately 3.29
• Valuation interpretation: As a leading telecom provider with stable cash flow and strong dividend capacity, its PBR reflects market premium for stable earnings.

US Stocks

1. Ford Motor (F)

• PBR: approximately 1.19
• Valuation interpretation: Traditional automaker with heavy assets, resulting in a low PBR. If the company successfully transitions to electric vehicles, there is potential for revaluation.

2. JPMorgan Chase (JPM)

• PBR: approximately 1.94
• Valuation interpretation: Largest global financial services group, with substantial net assets. Its PBR is within a reasonable range, offering defensive qualities.

3. General Electric (GE)

• PBR: approximately 0.70
• Valuation interpretation: Diversified industrial giant in transition, with a low PBR indicating potential undervaluation, but watch for progress in restructuring.

NAVPS vs. EPS: The Difference in Investment Strategies

Many investors confuse these two concepts. Simple distinctions:

• NAVPS: Reflects stock of assets—the company’s “home base”
• EPS: Reflects profit-generating ability—the company’s annual income

A company might have a high NAVPS, indicating solid assets, but if profits are slim, EPS is low, making it a less attractive investment. Conversely, a startup tech company might have a low NAVPS but high EPS growth, offering significant growth potential.

Value investors’ approach: NAVPS strategy

• Seek stocks trading below their NAV
• Focus on companies with stable NAV growth
• Suitable for defensive investors with lower risk

Growth investors’ approach: EPS strategy

• Track accelerating EPS growth
• Use P/E ratio to evaluate valuation
• Suitable for aggressive investors aiming for higher returns

How to Efficiently Check NAVPS?

Method 1: Directly on trading platforms

• Platforms like Gate.io display stock data directly
• Specialized websites like StockFun, HiStock, Financial Report Dog, nStock also provide data

Method 2: Calculate from financial reports Using Uni-President as an example, check its 2021 annual report and extract:

• Total assets: 414,655,454 thousand yuan
• Total liabilities: 254,606,345 thousand yuan
• Shares outstanding: 56,820,154 thousand shares

Calculation: NAVPS = (414,655,454 - 254,606,345) / 56,820,154 ≈ 2.8 yuan

Mastering this method allows you to verify any listed company’s NAVPS at any time without relying solely on others’ data.

Conclusion: How Reasonable is a PBR? It Depends on Your Investment Logic

There is no absolute “reasonable” number for PBR; it depends on:

1. Industry characteristics: Heavy asset industries should have lower PBR, light asset industries can have higher
2. Company quality: Premium valuation for high-quality companies is justified; low PBR for poor companies has reasons
3. Your risk appetite: Those with high risk tolerance can accept high PBR growth stocks; conservative investors should stick to 1-2x safety zone
4. Market cycle: In bear markets, overall PBR tends to decline; in bull markets, it rises

Therefore, rather than memorizing “what PBR is reasonable,” learn three practical skills:

• Horizontal comparison: Compare different companies within the same industry
• Vertical analysis: Compare the same stock’s historical PBR
• Comprehensive evaluation: Combine with other indicators like EPS, ROE, growth rate for judgment

Remember, true investment opportunities often lie in discovering well-managed companies that are systematically undervalued by the market, not blindly chasing low PBR.