Booyah Breakdown: Book Value

Editor's note: Welcome to "Booyah Breakdown," an explanation of certain terms and topics Jim Cramer discusses on his "Mad Money" TV show. Feel free to ask a question if you're confused about something Cramer talks about, but please keep in mind that we do not provide advice on specific stocks.

Shopping for stocks is a lot like shopping for cars. What you're in the market for will depend on how you evaluate your options.

Let's say you're looking for, oh, I don't know, a Lamborghini Gallardo or a Ferrari F430 (Isn't everyone?). You're clearly concerned about the superb transmission, the massive gripping and, more importantly, how your date will react when you pull up in it.

If you're in the market for -- ugh -- a minivan (welcome to my world), you could use sex appeal as a valuation method, but it won't get you very far. You're probably much more concerned about its airbags, its ability to seat your kid's entire soccer team and the keypad's ability to not only to open the doors, but possibly pour the kids' drinks and stop the sibling squabbling.

Picking stocks is pretty similar. Certain stocks meet certain needs for your portfolio, and there are many different valuation metrics out there that can help you make the right choices.

And while you should consider all of them -- just because I drive a minivan doesn't mean I don't have sex appeal! -- some metrics just hold more relevance in certain industries.

This brings me to a topic I've received a lot of emails about. Jim Cramer has said on "Mad Money" that he won't buy certain companies that were trading at more than two times book value. Back in April, when a caller asked about Investors Bancorp (ISBC - Cramer's Take - Stockpickr), he said, "It sells at less than two times book. ... good service, good people, you hold onto it."

That's because calculating the book value, and the corresponding price-to-book ratio, of financial stocks is a great way to analyze them. "Booyah Breakdown" is going to tackle that rationale for you today.

To watch Tracy Byrnes' video take of this column, click here.