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How to use Price-to-Book Value Ratio

techniques May 16, 2018
 

By Puah Soon Lim

To test my student's understanding of the price-to-book ratio in one of my investment classes called the “Building Blocks for Value Investing” held at the SGX Academy, I asked the class to guess if a stock's price to book valuation is better to be below one or greater than one.  Most of them were able to guess correctly, but when I asked them to explain why they categorize a stock's P/BV < 1 or P/BV > 1,  all of them have a hard time explaining the rationale. This is a ratio that is more complex than it looks.

In this article, I will attempt to provide more clarity on the price to book ratio and how to use it in your investment analysis. More importantly, as value investors, how to use this ratio as a value screen.

For those who are keen to test your take on this ratio, the eight companies that I used in class are the following:

Noble Group
CapitaLand Limited
Singapore Airlines
Singapore Telecommunication Ltd
Nestle (Malaysia)...

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Go Beyond the PE Ratio: EV/EBITDA

techniques May 01, 2018

By Puah Soon Lim

 

Today’s post is a fairly new development. It became popular during the dot-com bubble in the year 2000. I have received a lot of question on this one from newbie investors as well as the more experienced ones.

There are actually some academic researchers that purportedly claim that this is the single most important ratio in the valuation of a business. My view is that it is just one additional tool that investor should have in their arsenal. Both Warren Buffett and Charlie Munger have expressed their dislike for this number during the years leading up to the dot-com bubble.

EV/EBITDA

I will start off by explaining the numerator first.

In the numerator, we have the Enterprise Value (sometimes also referred to as total enterprise value), primarily it is looking at valuing a company from the perspective of both the equity holder and the bondholder. If you are familiar with the concept of market capitalization, you are halfway there to...

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Never Run Out Of Investment Ideas with "The Magic Formula"!

techniques Apr 04, 2018

By Puah Soon Lim

 

Joel Greenblatt made his name running Gotham Capital and he made a lot of money doing it with annualized returns reported at 50% annually. He also wrote a very popular book “The Little Book that Beats the Market” which he shared in some of the public talks. He has the intention of teaching his children about investing and also to let them gain some insights into what a hedge fund manager does for a living. He wrote: “If you can’t explain the concept to a three-year-old, then you really do not understand it”. That is why I enjoy his book so much, and I have been recommending “ The Little Book that Still Beats The Market” in a lot of my talks. Greenblatt has a knack for explaining a complicated concept and distill them down to easy to understand snippets.

The central theme of the book is  “The Magic Formula” which is essentially a ranking system that he developed...

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Benjamin Graham's Net-Net Stocks

techniques Mar 21, 2018

By Puah Soon Lim

 

Cigar Butts Anyone?

Recognized as the father of securities analysis, Benjamin Graham argued for investing in stocks that were significantly undervalued relative to their intrinsic worth. Among the most widely adopted strategies of his is the cigar butts approach (also known as the Net-Net approach). This strategy alone brought him high profits in the 1930s to 1956. Buffett also successfully implemented this strategy during his Buffett Partnership years from 1956 to 1969.

The key measure of this approach is the ratio NCAV/MV which is the balance sheet current assets minus all the firm's (current and long-term) liabilities divide by market capitalization. Long-term assets (e.g. intangible assets and fixed assets) values are not counted. An undervalue investment will be one that has an NCAV that is above the market capitalization of the stock. In his classic book The Intelligent Investor, Graham recommended for a margin of safety to be built into this...

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How to start to "do your homework"?

techniques Feb 22, 2018

By Puah Soon Lim 

 

Some twenty years ago, while sitting in front of my Bloomberg terminal, I remarked to my colleague sitting beside me that “doing your homework” is tough for an investor. Back then, I was already working in the finance industry for a few years and with my Accounting knowledge from my undergraduate days, and CFA Program, I was still grappling with “doing my homework".  

My colleague, who was a veteran bond trader, agreed wholeheartedly. He remarked, “Young man, you have a lot to learn.” Since then, I have always wondered how the rest of the retail investors cope with this task of “doing their homework.” 

Since then, I have always wondered how the rest of the retail investors cope with this task of “doing their homework.” We are advised by the experts to do our homework, study the report, and arrive at our buying and selling decisions. That is fine for some, but in my...

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