How to Find the Least Risky Penny Stock Using P/BV Indicator?
The P/BV ratio is the ratio of the market share price to the value of assets per share. P/BV does not talk about the company’s ability to make a profit, but gives an idea of whether the shareholder overpays for what will remain of the company in case of its instant bankruptcy.
P/BV less than one is good. More than one dollar of the company’s real value is accounted for one dollar of market capitalization. If the company goes bankrupt and the shareholders are allowed to return their shares, they will have something to return.
P/BV more than one is bad. One dollar of market capitalization accounts for less than one dollar of the real value of the company. If the company goes bankrupt and the shareholders are allowed to return the shares, then there will not be enough for all.
The advantage of P/BV is its stability: it is less than the net profit, depending on the current changes in the economic situation.
It is important for the OTC stock investor to remember that the P/BV Ratio does not reflect the company’s ability to create profit or cash for shareholders. And there is a serious limitation in its use: it is applicable for Small Cap companies with material assets on the balance sheet (buildings, land or financial assets), and is not suitable for the evaluation of service or technology companies whose main assets are intangible (patents, licenses, trademarks). Another disadvantage of the P/BV indicator is that the book value of assets is an accounting value, and it depends heavily on the accounting rules applied.