Booyah Breakdown: Book Value

Every Car Still Needs Good Brakes

Regardless of your company's industry, you still should look at the price-to-book ratio because it will give you a good feel for how your stock is trading against the rest of the market. In addition, it's a pretty stable number over time, since you're working with hard assets, says Matt McGrath, senior vice president at the financial planning house of Evensky & Katz in Coral Gables, Fla. The value of those assets doesn't change on the books with changing market conditions.

You can't say that about the ubiquitous price-to-earnings ratio. That baby varies since earnings are strongly affected by different sets of accounting rules.

So, a good way to use the price-to-book ratio is to compare your stock to the overall market. These days, the S&P 500's price-to-book ratio is hovering around 2.5 to 3.

Where does your company fall? If its price-to-book is lower, it might be a good value play. If it's higher, it could be more of a growth stock that the market is willing to put a premium on. Either way, use the ratio as a springboard for further investigation.

So let a company's book value and its corresponding price-to-book ratio help you test drive some stocks. Just don't let that one ratio make-or-break your decision.

Same goes for the Lamborghini. Just because the pedals are close together and your feet are too big doesn't mean you shouldn't buy.

It just means you should let me drive it because my feet are smaller.

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