One of the criteria Value Investors use is ‘Price to book value ratio’ . You hear from time to time that PE ratio is not as relevant as the PB ratio, so by that criteria we are not over valued at all. In fact we are nowhere near the 2008 peak.

That is true, but ask yourself how relevant is the term Book Value?

Book value is the accounting term to measure the acquisition cost less depreciation of a particular business. For all practical purposes it is a work of fiction. You could be a 80 year old company – and if you have never revalued your assets – all your real estate could be valued at a fraction of the current market price.

The ‘realisable value’ or the ‘slump sale’ value of the business could be very different from the accounting fiction called ‘book value’.

When the world’s best companies were big manufacturing companies, and assets really mattered, maybe book value made sense. However look at the biggest companies today Facebook, Alphabet (aka Google), Amazon, or the wannabes like Linkedin, Flipkart, Uber, Ola, Twitter……NONE of them have any significant assets. Even Apple has it strengths in design, Rand D, marketing – and the manufacturing is outsourced! Air bnb, Uber, Ola – are typically asset light models and many people seem to be following that.

Book Value does not capture Human resources, training inputs, relationships with customers and vendors, the Systems that run the company, ability to raise money, reputation, ….etc.

So in an economy where the owning of the assets is separated from the usage of assets (airbnb, Uber, Ola, ..) ask yourself ‘does this ratio really tell you anything ANYMORE’?

This ratio is a relic of the past. Time to ignore it.