In the 1920s and '30s when investors like
Benjamin Graham outlined the concepts of
value investing and estimating a company's value, book values were more relevant than in later years. Most companies in this era had significant investments in tangible assets, and such assets comprised the bulk of the value of the company. The value of today's companies, other than asset based companies like investment trusts and property companies, is very different from the book values and there is often no relationship between their intrinsic values and their book values. In his 2000 annual report, Graham disciple
Warren Buffett said "In all cases, what is clear is that book value is meaningless as an indicator of value". Except in the case of a small minority of companies, like property companies and investment trusts that are asset-based, book values can bear little or no relationship to true values of the companies. The items on a company's balance sheet are the result of various transactions, recorded using double-entry bookkeeping at a particular point in time, to the extent that they do not form part of the profit and loss account to that point in time. The assets and liabilities comprising the book value are mainly stated at historic cost though a few items therein may be stated at valuations. In many of today's companies, their most valuable assets are not shown on the balances sheet and are therefore not necessarily reflected in the company's book value. In these types of companies, factors such as copyrights,
intellectual capital, internally generated goodwill, or brand awareness are much more valuable than the tangible assets listed on their balance sheets. This generally leads the company's market value to be higher than its book value. Despite the limitations of the price-book ratio, academic research has repeatedly shown that stocks with low price-book ratios tend to outperform stocks with high price-book ratios in the United States and other nations.
Eugene Fama and
Kenneth French incorporated a price-book term in their influential three factor model. Penman Richardson and Tuna (2013) show how the price-to-book ratio can be decomposed into financing and operating components. Foye and Mramor (2016) show that while stocks with low price-book ratios normally outperform, the ratios decomposed elements exhibit a different relationship with returns in different countries, implying that the price-book ratio may have a country-specific interpretation. ==See also==