Book Value Per Share

Book value per share is a comparison between the actual value of a business versus the price that people are paying for it.

Book value per share = stockholder's equity/outstanding shares

The book value part of the “book value per share” is the dollar value of the business if they sold everything that they own.

The outstanding shares is the number of shares that the business has outstanding.

Now what do you do with this number?

You compare it to the current price per share of the company.

If the current price is less than the book value per share, then you're paying less for the company than the value the business would be worth if they sold everything. If the current price is more than the book value per share, then you're paying more for the company than the value of the business.

It's important to note that while this may be perceived as getting good value for your investment, there are companies that are worth far more than the price of what they own. Why? Well, it could be a number of reasons, they have a big brand name, they have technology or information that is more valuable than money. These types of assets are called intangible, and don't have a dollar value attached to them.

By comparing the book value per share between other companies in the same industry, a sense for the industry as a whole and the performance of an individual business can be evaluated.

Comparing P/E Ratios of Canada's Five Big Banks

To find the Price/Earnings (P/E) of a company, do the following:

1.) Go to: http://money.ca.msn.com/investing/

2.) Enter the ticker symbol of your chosen company in the “Name or Symbol” field (note “.to” is not required because Canada is listed as the market already)

3.) P/E is listed is the second entry in the table, in the right hand column under the chart

Repeat for each of the five companies selected, and add it to the table of info:

Company
Net Profit Margin (last 12 months)
Earnings Per Share
Revenue Per Share
Price/Earnings Ratio

Royal Bank of Canada (RY)
13.60%
2.56%
20.68
20.25

Toronto-Dominion Bank (TD)
16.39%
3.49%
19.88
20.09

Bank of Nova Scotia (BNS)
25.32%
3.32%
14.23
14.84

Bank of Montreal (BMO)
16.84%
3.29%
19.28
15.57

Canadian Imperial Bank of Commerce (CM)
12.04%
2.65%
25.97
18.6

A couple of observations about the P/E ratios:

BNS and BMO P/E ratios are relatively lower than RY and TD, indicating greater value in BNS and BMO.

To date - if net profit margin, earnings per share, and P/E ratio are weighted equally, the pecking order among the 5 big banks is as follows:

1.)BNS
2.)BMO
3.)TD
4.)CM
5.)RY

When comparing P/E ratios between industries, Research in Motion (RIM) P/E is 17.66 and Brookfield Properties Management (BPO) is 24.18

Research In Motion (RIM) is the designer and manufacturer of the award-winning BlackBerry® smartphone, used by millions of people around the world. The company also creates solutions for the worldwide mobile communications market, including the software that allows the BlackBerry smartphone to provide mobile access to email, applications, media and the Internet. http://www.rim.com/company/

BPO is “a commercial real estate corporation that owns, develops, and operates premier assets in the downtown cores of high-growth North American cities” http://www.brookfieldproperties.com/corporate/

Price to Earnings Ratio

The price to earnings (P/E) ratio – one of the most highly sought after ratios in the world of investment.

The P/E ratio is the stock price/earnings per share. If the stock price is $10.00, and the earnings per share is $2.50, then the P/E ratio is $10.00/$2.50 = 4.

Typically, companies in higher growth industries will have higher P/E ratios, and companies in lower growth industries will have lower P/E ratios.

Some investors argue that a lower P/E ratio indicates that the investor is getting more value for their investment dollars, and other investors suggest that higher P/E ratios indicate greater potential for gains on their investment dollars.

For these reasons, I compare P/E ratios between companies in the same industry (and all ratios for that matter, thus the approach of comparing all data between the five big Canadian banks).

For more information about P/E ratios, Motley Fool and Investopedia have more information:

http://www.fool.com/investing/value/2006/08/29/how-to-use-the-pe-ratio.aspx

http://www.investopedia.com/terms/p/price-earningsratio.asp

As an aside, it'll be interesting to observe the impact that today's news about Canada's 5% GDP growth in the fourth quarter of 2009 will have on the five big banks, if any. When I hear news like this, I ask (and find the answers to) questions like – what does economic growth mean for interest rates? What impact does that have on the profitability of banks? What will the next media headline be for the company that I am invested in or considering investing in? What will that mean for the stock price next week, next month?