What is PDDD (Market Value Book Value)
What is PDDD (Market Value Book Value)
What is PD/DD?
Market Value / Book Value ratio is one of the valuation ratios frequently used by investors in the fundamental analysis process. This metric is used in the global finance literature as Price-to-Book Ratio, or PB for short.
PD/DD compares the company's market value with its accounting value. As can be understood from the definition, this financial metric consists of two variables. The value in the share section corresponds to the market value of the company or the price of a single share. The value in the denominator corresponds to the company's equity or equity per share. Thanks to this valuation ratio, investors can calculate how much of the company's market value is based on equity. The PD/DD ratio is calculated as follows:
PV/DD = Market Value / Book Value (Equity)
PV/DD = Market Value per Share / Equity per Share
Securities that represent the capital of the partnership and divide it into equal nominal values, and give the owner, that is, the shareholder, the right to share in the capital in question, are defined as shares.
Shares are priced depending on the supply and demand of investors. Supply and demand for stocks vary depending on company-related developments, news flows, expectations, macroeconomic - political - geopolitical events.
The total value of a company's shares traded or offered to the public represents the market value of that company. In other words, market value is the product of the share price of the relevant company and the number of shares traded in the market (total lot of shares). The number of shares of a company traded in the market is equal to its paid-in capital. Market value is calculated as follows:
Market Value = Stock Price x Number of Shares (Paid-in Capital)
Market value is a forward-looking measure. In other words, the value of a stock (market value of the company) consists of expectations for future appreciation and dividend payments of the relevant security.
What is Book Value?
Book value is the accounting value of a company. In other words, it corresponds to the equity of the company. Equity of a company; It is the remainder after deducting liabilities from the assets on the balance sheet. In other words, it is the net asset value of the company. This metric represents the ownership ratio of company partners on tangible assets.
Unlike market value, a company's book value is a historical metric. In other words, in some cases, assets (fixed assets) may appear on the balance sheet below their current value, that is, they may not adequately reflect current market conditions. On the other hand, liabilities are recorded at their current values in the company's balance sheet. Therefore, it is not a metric that can fully reflect company value.
However, while book value only considers tangible assets, trademarks, patents, etc. It does not include intangible assets in the calculation. This is another factor that causes the company value to not be determined exactly. As a result, under normal circumstances, a company's equity may be greater than stated in its accounting records. However, despite all these limitations, book value is accepted by investors as a standard metric. Book value is calculated as follows:
Book Value = Company Assets – Company Liabilities = Equity
Equity per Share = Equity / Paid-in Capital
PD/DD ratio is one of the valuations used to determine to what extent the market value is premium/discounted compared to the company's equity. Investors try to make inferences about the market valuation of the company they aim to invest in by comparing it with the PV/DD ratios of similar companies or the industry in general.
What should be the PD/DD value?
There is no clear answer to the question of what the Market Value / Book Value should be. A meaningful result can be obtained when a company's PD/DD value is compared with the average of its competitors and the industry it belongs to. From a mathematical perspective, the PD/DD ratio should be 1; It means that the company's market value is priced in one-to-one ratio with its equity.
PD/DD ratio; It is used to determine to what extent the market value is premium/discounted compared to the company's equity.
If the market value is higher than the book value, the PV/DD ratio exceeds the threshold of 1. In other words, the company is priced at a higher level compared to its financial situation. A high PD/DD ratio may mean that the company is priced at a premium (expensive). In this case, the market value is expected to converge to the book value over time, that is, to decrease. On the other hand, a high PD/DD ratio may also mean that the market has high expectations for future capital gains and dividend payments of the relevant stock.
If the market value is lower than the book value, the PV/DD ratio will remain below the 1 threshold. In other words, the company's financial performance is not fully reflected in its market value. A low PD/DD ratio may mean that the company is priced at a discount (cheap). In this case, over time, the market value is expected to converge to the book value, that is, to increase. On the other hand, a low PD/DD ratio may also reflect risks and loss expectations for the company.
Why is PD/DD Important for Investors?
PD/DD ratio alone is not a sufficient metric to make investment decisions. Meaningful results can be obtained when this valuation ratio is compared with the average of its competitors and the industry it is affiliated with and when evaluated together with other fundamental analysis tools.
Market Value / Book Value ratio can provide investors with a quick and standard input for valuing the company, provide insight into the company's growth potential - risks - value opportunities, and can be used to quickly compare industry and rival companies.
