What is ‘Price to Tangible Book Value’?
The ‘Price to Tangible Book Value’ ratio is a more conservative evaluation of a company’s book value.
When typically calculating a company’s book value all assets, including intangible assets such as goodwill, are factored into the calculation. These assets are frequently overstated to inflate a company’s balance sheet.
Using only the tangible assets on the company’s balance sheet to calculate a company’s book value investors can get a much more conservative value of a company’s book value.
To calculate the ‘Price to Tangible Book Value’ ratio take the value of a company’s total assets as listed as the company’s balance sheet and subtract the value of the intangible assets listed.
The example below uses Intel’s 2012 2nd quarter balance sheet, located in the company’s 10Q filing with the SEC.
(click to enlarge)
The entire balance sheet is below:
(click to enlarge)
Using the example above we subtract intangible assets from total assets to get the company’s tangible book value:
Giving Intel a tangible book value of about $33.3 Billion.
To create the ‘Price to Tangible Book Value’ ratio, we compare the tangible book value to the company’s current market cap.
At the time of writing, Intel has a market cap of about $110 Billion.
This gives of a ‘Price to Tangible Book Value’ ratio of:
Giving us a Value of about 3.3.
This means that the price Intel current trades on the market is 3.3 times the price of its tangible book value.
Investors can look for potential value in a company’s stock by finding company’s trading at low Price to Tangible Book Value multiples. A Price to Tangible Book Value multiple of less than 1 means that the company is trading below the value of its tangible assets. It should not be a sole purpose of investing in a stock, but is a sign that the company is undervalued.
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