Choosing a stock is the most important things part of one's portfolio. Be it a bull market or a bear one, the stocks in your portfolio determine your gains and losses and a number of different metrics are used to determine if a stock should be purchased or not.
The price to book (P/B) ratio is one such value. P/B ratio generally indicates whether the stock is worth how much the investor is paying and how much will the investor get if it goes bankrupt.
If the P/B ratio of a stock is lower, then it indicates that the stock is undervalued and vice versa. A low P/B ratio can indicate some fundamental problems with the firm like high debt, fewer assets, etc.
Along with the P/B ratio, it is also important to look at the cash reserves of a company. If a stock has a low P/B ratio, how do you determine whether it is due to some fundamental issue (like high debt) or is it actually undervalued; you look at its cash reserves. If a company has strong cash reserves in its balance sheet, it determines that the stock is fundamentally strong.
P/B ratio compares the market value of a stock to its book value. Let's first understand what is market value and book value. Market value refers to the company’s market capitalisation. It is calculated by multiplying the share price of a firm with its outstanding shares. Meanwhile, the book value refers to the amount shareholders will receive if it is suddenly shut down or liquidated with no liabilities. It is calculated by subtracting the total liabilities from the total assets of the company. It is disclosed in the balance sheet of the company every quarter.
Usually, a P/B ratio of less than 1 shows an undervalued stock. However, it depends from sector to sector. Meanwhile, a P/B ratio of 1 indicates that a stock is fairly valued. A P/B ratio of over 3 showcases that the stock is overvalued and may fall in the near future. This showcases the stock is trading at 3 times its book value and thus helps investors avoid such firms.
Amid these times of recent correction, when most stocks have entered their bear phase, let's take a look at some stocks with high cash reserves and a low P/B ratio, making them a good investment bet:
ONGC has a cash reserve of ₹2.5 lakh crore, a debt-to-equity ratio of 0.47, a P/E ratio of 3.87 and a P/B ratio of 0.69. ONGC is engaged in the exploration, development and production of crude oil, natural gas and value-added products. Its segments include Exploration and Production; and Refining and Marketing. In Q4, ONGC reported a 10 percent rise in consolidated net profit at ₹12,061 crore versus ₹10,963 crore in the year-ago period. Its consolidated revenue from operations rose 37 percent to ₹1.55 lakh crore in Q4FY22 as against ₹1.14 lakh crore in Q4FY21. It has risen 17 percent in the last 1 year.
Vedanta has a cash reserve of ₹65,000 crore, a debt-to-equity ratio of 0.82, a P/E ratio of 4.37 and a P/B ratio of 1.29. Vedanta is a diversified natural resources company. The Company produces aluminum, copper, zinc, lead, silver, iron ore, oil and gas, and commercial energy. In Q4, its net profit stood at ₹5,799 crore, down 9.84 percent from ₹6,432 crore in the same quarter last year. The revenue from operations climbed to ₹39,342, jumping 41.14 percent from ₹27,874 crore in the year-ago quarter. It has fallen 13 percent in the last 1 year.
Oil India has a cash reserve of ₹29,000 crore, a debt-to-equity ratio of 0.55, a P/E ratio of 4.66 and a P/B ratio of 0.83. It is an integrated exploration and production company in the upstream sector, which is engaged in providing crude oil and natural gas. The Company's segments include Crude Oil, Natural Gas, LPG, Pipeline Transportation, Renewable Energy and Others. In Q4, the company reported its highest-ever quarterly net profit of ₹1,630 crore which is almost doubled, as compared to ₹847.56 crore profit in the same period last year. In the last 1 year, it jumped almost 50 percent.
GSPL has a cash reserve of ₹7,354 crore, a debt-to-equity ratio of 0.09, a P/E ratio of 7.4 and a P/B ratio of 1.5. It is a natural gas infrastructure and transmission company, primarily engaged in the transmission of natural gas through the pipeline on an open-access basis from supply points to demand centers. In Q4, it reported a 32 percent decline in its consolidated net profit at ₹791 crore. It fell 35 percent in the last 1 year.
Uflex has a cash reserve of ₹6,623 crore, a debt-to-equity ratio of 0.71, a P/E ratio of 3.7 and a P/B ratio of 0.64. It is engaged in the manufacturing and sale of flexible packaging products. The Company’s segments include Flexible Packaging Activities and Engineering Activities. In Q4, the firm reported a 32.32 percent growth in its consolidated net profit to ₹350.59 crore versus ₹264.95 crore during the January-March quarter a year ago. Its revenue from operation was up 50.83 percent to ₹3,867.75 crore during the quarter under review as against ₹2,564.17 crore in the corresponding period of the previous fiscal. It rose 27 percent in the last 1 year.
Sarda Energy has a cash reserve of ₹2,967 crore, a debt-to-equity ratio of 0.53, a P/E ratio of 3.5 and a P/B ratio of 0.98. The firm is engaged in the metal, mining and power sector. The Company's segments include Steel, Ferro and Power. The company reported atotal income of ₹1092.49 crore in Q4FY22 as compared to ₹741.31 crore during the year-ago period. Its net profit came in at ₹213.41 crore in Q4FY22 versus ₹139.43 crore for the period ended March 31, 2021. It rose 25 percent in the last 1 year.
Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered financial advisor before making any investment related decision.