How to use the Price-To-Book Ratio To Evaluate Companies?

What price should you pay for a company's shares? If the goal is to unearth high-growth companies selling at low-growth prices, the price-to-book ratio (P/B) offers investors a handy, albeit fairly crude, approach to finding undervalued treasures. It is, however, important to understand exactly what the ratio can tell you and when it may not be an appropriate measurement tool.

Difficulties of Determining Value

Let's say you identify a company with strong profits and solid growth prospects. How much should you be prepared to pay for it? To answer this question you might try using a fancy tool like discounted cash flow analysis (DCF) to provide a fair value. But DCF can be tricky to get right, even if you can manage the math. It requires an accurate estimate of future cash flows, but it can be awfully hard to look more than a year or two into the future. DCF also demands the return required by investors on a given stock, another number that is difficult to produce accurately.

Source : Investopedia