What is Price to Tangible Book Value?
The Price to Tangible Book Value (P/TBV) ratio measures a company’s market capitalization relative to its book value of equity, net of intangible assets.
How to Calculate Price to Tangible Book Value (Step-by-Step)
The price to tangible book value (P/TBV) is an equity valuation ratio that compares a company’s market value of equity to its tangible book value (TBV).
- Market Capitalization → The market capitalization, or “equity value”, of a company is the total value of its common shares outstanding to its equity holders. In short, the market cap is the fair value of a company’s common equity, i.e. the market value of equity, which is set by the latest transactions in the public markets, as of the present date.
- Tangible Book Value (TBV) → The tangible book value (TBV) measures how much a company’s tangible assets are worth, net of intangible assets, which refer to non-physical assets (e.g. goodwill, intellectual property, trademarks, copyright, patents). Contrary to the market cap, the tangible book value (TBV) is an adjusted accounting metric, where the recorded value of a company’s intangible assets is deducted from the book value of equity (BVE).
Since the tangible book value (TBV) metric removes the value of intangible assets, i.e. non-physical assets, the TBV is a closer representation of the remaining net value belonging to common equity holders post-liquidation, i.e. once all outstanding liabilities on the balance sheet, such as debt, are repaid in full.
For example, the recognition of goodwill on a company’s balance sheet is a required accrual accounting convention intended to capture the excess purchase price paid in excess of the acquired asset’s fair market value (FMV).
Therefore, the tangible book value (TBV) is a more conservative approximation of the value of a post-liquidation company because all outstanding debt and liabilities like accounts payable (A/P) are of higher priority relative to claims held by common shareholders.
The drawback, however, is that TBV is still a rough estimation of a company’s hypothetical liquidation value, as certain intangible assets can in fact possess value and be sold in a liquidation proceeding. In addition, the liquidation value of tangible assets is rarely ever actually equivalent to the value as recorded on the balance sheet.
Learn More → Valuation Multiple
Price to Tangible Book Value Formula (P/TBV)
The formula used to calculate the price to tangible book value ratio (P/TBV) is as follows.
- Market Capitalization = Latest Closing Share Price × Total Number of Diluted Shares Outstanding
- Tangible Book Value (TBV) = (Total Assets – Intangible Assets) – Total Liabilities
Alternatively, the price to tangible book value ratio (P/TBV) can also be expressed on a per-share basis.
- Market Share Price = Market Capitalization ÷ Total Number of Diluted Shares Outstanding
- Tangible Book Value Per Share (TBVPS) = Tangible Book Value (TBV) ÷ Total Number of Diluted Shares Outstanding
Price to Book Ratio (P/B) vs. Price to Tangible Book Value (P/TBV)
The price to book (P/B) and price to tangible book value (P/TBV) are near-identical valuation ratios that compare a market value metric to a bookkeeping metric.
- Price to Book (P/B Ratio) → The P/B ratio compares a company’s market value of equity (i.e. market capitalization) relative to its book value of equity (BVE). The book value of equity (BVE) is equal to a company’s total assets minus its total liabilities, so the metric is inclusive of intangible assets.
- Price to Tangible Book Value (P/TBV) → The P/TBV is virtually identical to the P/B ratio, aside from the additional step of removing the value of intangible assets. For companies with significant amounts of intangible assets recorded on their balance sheets, the P/BV can be distorted and potentially misleading, which is where a more conservative measure like the P/TBV ratio can be more appropriate.
The formula used to calculate the price to book ratio (P/B) is as follows.
Like the price to book ratio, a lower price to tangible book value ratio is interpreted as a positive sign that the underlying company could potentially be undervalued (or vice versa for higher ratios).
- Lower P/TBV Ratio → Potentially Undervalued Market Pricing
- Higher P/TBV Ratio → Potentially Overvalued Market Pricing
