Price-to-Book Ratio Stock Selection Guide: How to Use Book Value Per Share to Find Undervalued Good Stocks

What Does Net Asset Value Per Share Actually Represent?

Net Asset Value Per Share (NAVPS) is one of the core indicators used to measure a listed company’s financial health. Simply put, it reflects the true asset value represented by each share of the company.

From an accounting perspective, NAVPS equals the company’s net assets divided by the number of outstanding shares:

NAVPS = (Total Assets - Total Liabilities) / Total Outstanding Shares

It can also be expressed as:

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

What is the essence of this indicator? It represents the asset value that each shareholder could theoretically receive if the company were liquidated today. In other words, a higher NAVPS indicates a stronger asset base and higher shareholder equity.

Let’s understand with an example: Suppose Uni-President’s total assets are NT$2.5 billion, total liabilities NT$1 billion, and there are 1 billion shares outstanding. Then, NAVPS = (2.5 - 1) / 1 = NT$1.5.

Why Focus on Price-to-Book Ratio?

The Price-to-Book Ratio (PBR) is the real indicator investors should pay attention to. Its calculation is straightforward:

PBR = Market Capitalization / NAVPS

This ratio reflects how much the market is willing to pay for each dollar of the company’s net assets.

A lower PBR indicates a cheaper stock; a higher PBR suggests an expensive stock. This seems intuitive, but in actual investing, it can be misleading.

For example, Kinmen Kaoliang’s stock price is NT$18, with an NAVPS of NT$10, so PBR = 1.8; Uni-President’s stock price is NT$20, with an NAVPS of NT$15, so PBR ≈ 1.33. Based on PBR, Uni-President appears cheaper, but that doesn’t necessarily mean it is a better investment.

Is a High NAVPS Always a Good Stock? Common Misconceptions

Many novice investors fall into the trap of thinking: the higher the NAVPS, the better the stock. In reality, this logic is flawed.

NAVPS only reflects the accumulated asset value from past operations and does not indicate future profitability. A company might have a large asset base (high NAVPS) but poor management, low product demand, making high NAVPS meaningless for investors.

Conversely, many high-growth companies have relatively low NAVPS. Companies like Microsoft, NVIDIA, and Netflix, driven by innovation and intangible assets, have NAVPS far lower than traditional manufacturing firms, yet their returns far surpass.

Two main factors influence changes in NAVPS that investors should distinguish:

1. Changes in operational performance. If poor management causes NAVPS to decline, it’s a warning sign.
2. Financing activities, including issuing new shares or distributing stock dividends. While issuing new shares increases net assets, it doesn’t necessarily indicate growth potential; distributing stock dividends dilutes NAVPS but doesn’t mean poor management.

Why Do Stock Price and NAVPS Deviate?

Stock prices are determined by expected future earnings, not current NAVPS. This is key to understanding the stock market.

Stock value = Present value of future cash flows

NAVPS is just an accounting figure, representing the company’s accumulated net assets. If a company earns steady profits annually, its NAVPS increases over time; if it incurs losses, NAVPS shrinks. However, in the short term, stock prices can move in the opposite direction of NAVPS.

This means:

• An increase in NAVPS does not necessarily lead to a higher stock price
• A decrease in NAVPS can coincide with rising stock prices (e.g., through stock dividends or buybacks optimizing capital structure)

Investors need to understand that stock prices are influenced by market sentiment, industry outlook, competitive landscape, policies, and other factors, which are not directly caused by NAVPS.

Industry Differences in NAVPS Significance

This is a common oversight when using NAVPS for stock selection: the meaning of NAVPS varies greatly across industries.

For capital-intensive industries (e.g., steel, shipping, real estate, manufacturing), NAVPS is crucial because profitability depends heavily on tangible assets like factories, equipment, and resources. A high NAVPS indicates strong production capacity.

In contrast, for asset-light industries (e.g., software, media, gaming, fintech), the situation is reversed. These companies rely mainly on intangible assets like intellectual property, brands, and talent. A low NAVPS does not mean poor performance; some business models inherently have low or even negative net asset values but high profitability.

Comparing NAVPS across different industries is meaningless. PBR should only be used within the same industry to accurately reflect valuation levels.

NAVPS vs Earnings Per Share (EPS): Investment Strategies

Investors often struggle between NAVPS and EPS when selecting stocks. These two metrics each have their strengths:

EPS = (Net Profit - Preferred Dividends) / Number of Common Shares

The fundamental difference:

• NAVPS emphasizes asset base — how many tangible assets the company owns
• EPS emphasizes profitability — how much profit the company generates

A company might have substantial assets (high NAVPS) but low efficiency (low EPS); or small assets (low NAVPS) but high profitability (high EPS).

Investment strategies based on NAVPS:

• Value investors look for stocks trading below their NAVPS, believing in a margin of safety
• Suitable for assessing financial, real estate, and manufacturing companies
• Reflects the company’s resilience and financial stability

Investment strategies based on EPS:

• Growth investors seek stocks with high EPS growth rates
• Suitable for evaluating tech, consumer, and healthcare companies
• Reflects actual profit-generating ability and growth potential

Smart investors consider both metrics, along with P/E ratios, profit margins, and other financial indicators, for a comprehensive analysis.

How to Use PBR in Stock Selection?

When the PBR drops below its historical levels, it may signal a buying opportunity. For example, if a stock’s PBR has historically ranged from 1.6 to 2.5, falling below 1.5 could indicate undervaluation.

However, the key is to analyze why the PBR has declined. If the stock price has fallen sharply, is it due to market overreaction or company-specific issues? A continuously declining PBR may suggest deteriorating business conditions, and investors should avoid buying.

For example, in Taiwan stock market:

• TSMC’s PBR is about 4.29
• Formosa Petrochemical about 2.45
• Taiwan Mobile about 3.29

Compared to US stocks:

• JPMorgan Chase around 1.94
• Ford Motor around 1.19
• General Electric about 0.70

Why do US companies generally have lower PBRs? This reflects differences in valuation logic, industry structures, and investor expectations across markets.

The Core Significance of NAVPS

First, it measures the company’s long-term operational performance. NAVPS is the accumulated result of past profits or losses. A higher NAVPS indicates a stronger ability to create value over time. Comparing NAVPS across different periods for the same company helps assess operational improvement or deterioration.

Second, it provides a relative valuation benchmark. When the company’s fundamentals are stable, comparing stock price to NAVPS can give an initial sense of over- or undervaluation. But this is only a preliminary judgment, not a sole decision criterion.

Third, it reflects the present value of shareholders’ equity. NAVPS represents the amount of assets each shareholder owns. In theory, if the company liquidates, each share’s value equals NAVPS. In practice, factors like depreciation and market fluctuations cause deviations.

How to Find NAVPS

Investors mainly have two ways:

• Check financial platforms directly. Most stock trading platforms and financial websites display NAVPS, PBR, and related info.
• Calculate from financial reports. For example, in 2017, Uni-President’s financial report shows net assets of NT$414,655,454, liabilities NT$254,606,345, and 56,820,154 shares outstanding. Then, NAVPS = (414,655,454 - 254,606,345) / 56,820,154 ≈ NT$2.8. This method helps deepen understanding of what NAVPS truly represents.

Proper Approach to Investment Decisions

NAVPS is an important but not the sole indicator. Blindly chasing higher NAVPS can cause investors to miss high-growth opportunities.

The correct approach involves:

• Considering industry-specific relevance of NAVPS
• Combining multiple metrics such as EPS, P/E ratio, profit margins for comprehensive analysis
• Understanding the drivers behind NAVPS changes (operational improvement vs financing activities)
• Focusing on future earnings potential rather than past asset accumulation

Ultimately, investment valuation hinges on the discounted value of future cash flows, not current net assets. NAVPS and PBR are tools to identify whether the market undervalues future potential, not investment targets themselves. Combining these with in-depth analysis of company fundamentals, industry outlook, and competitive advantages leads to truly informed investment decisions.