With so many companies listed on the stock markets, it can be exciting and challenging at the same time to determine which company to invest. Investors have to study a number of fundamentals of the stock before buying. Some example of fundamentals are ratios such as ‘return on net worth’, ‘earnings per share’, ‘return on invested capital’, or the ‘price-to-book ratio’ amongst others that can help determine the value of the company’s stock.
The PB ratio helps the investor compare the market value of a particular company’s shares/ market capitalization to its book value.
The price-to-book (P/B) ratio has been favored by value investors and is widely used by market analysts. Traditionally, any value under 1 is considered a good P/B value, indicating a potentially undervalued stock.
Starbucks has a very negative price to book ratio of -10.03.
However, Starbucks' balance sheet is less-than-ideal. The company has a negative debt-to-equity ratio means that a company has more liabilities than assets, which is often a risky sign from an investor's standpoint. I like to invest in companies with strong balance sheets because they offer companies more flexibility to navigate through any economic situation.
Even though Starbuck is trading at all time low valuation basing on the negative P/B ratio, I will not consider to buy the stock based on their balance sheet.
Comments