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Dykstra: A Look at Price-to-Book

Stocks in this article: CAM WFT

Monday was a day of bloodletting as NFL owners gave pink slips to coaches whose teams' playoff hopes were dashed on Sunday, if not long before that. The decisions can seem pretty cut and dried when it comes down to a team's win-loss record, like the Detroit Lions' 0-16 streak, which cost coach Rod Marinelli his job yesterday.

And the Jets' loss of four of their last five games was too much disappointment for Eric Mangini's bosses to take. Wins and losses are cold, hard facts that can't be argued down.

As in football, stock ratios are cold, hard numbers, usually based on data that can get fudged a bit. Using several ratios to value a stock helps to cover all your bases in case a company's earnings statements look a little too managed from quarter to quarter.

Nails on the Numbers

Last week, I looked at the price-to-earnings (P/E) ratio and the P/E-to-growth, or PEG, ratio. Both are good measures of a stock's value taken from the income statement.

Today, I will go over a tool for measuring a stock by looking at the company's balance sheet. That's the price-to-book ratio (P/B). This metric indicates how much the market values the company's assets. A P/B ratio below 1.0 indicates the market values the stock at less than its book value. A high P/B says that the market views the assets as generating growth. A low P/B says the market sees the company as a value stock.

To put price-to-book ratios in perspective, the iShares Russell 3000 Index (IWV) has an average P/B of 1.42.

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