How do you figure out why a stock has a price/book ratio of 0.07?

Question

Value investing puts great emphasis on the book value of a stock, which is said to represent what the shares are worth. But how do you determine whether a book value is comparable to your stock value? In one case I was able to understand the issue: look at the prospectus for GLBS (current stats, P/B 0.16) and observe the voting power of Series B preferred shares. But I don't understand at all why TNXP (current stats) would have an even lower P/B than that. (0.11 according to Yahoo Finance; 0.07 according to an Etrade statistic) I don't understand why this isn't considered "free money", but more importantly...

How do you go about researching whether the P/B ratio is low for some understandable reason?

Note: a similar question addresses various reasons why P/B value can be somewhat less than 1, but doesn't address how to research an exceptionally low value.

Answer 1

It seems you are looking at the price of 'preferred' shares, not 'common' shares for that company. Different share classes have different rights attached, and can vary widely in value.

'Preferred shares' are in some respects closer to debt than equity. They are typically offered for a set $ value, they typically have the right to a strict dividend amount [which is typically known in advance almost like a known interest rate on an offered bond], and they must get paid out before common shareholders [this applies to dividends, and also to payouts if the company liquidates, meaning first debtholders get paid, then preferred shareholders, then common shareholders if any value is left].

So preferred shares are typically considered lower risk than common shares, and don't really participate in the full "future earnings" potential of a company because their payouts are known in advance.

'Common shares' are probably what you think of most when you think of 'shares'. They represent the ownership of the full value of the company, and all profits of the company are attributable to those owners, after factoring that debtholders (and preferred shareholders) must first get paid out.

So the Price/Book ratio is not terribly relevant for preferred share value in most cases. A company with $10B in debt, $21B in Assets, and $500M of preferred shares, would show this ratio for the preferred shares as 500,000,000 / 11,000,000,000. The company could grow 500x further than that, and in most cases, the preferred shares would still just be worth close to the $500M they were originally offered for. Their value can go up and down, but more like a bond, where value is based mostly on the chance of bankruptcy against a known set dividend payment.

2 notes:

• I haven't looked in-depth at this company's balance sheet, so don't know if there are other issues at play.
• This situation is not uncommon; preferred shares are just another form of financing like any other, and are also often used as part of the method of allowing founders to retain some voting rights while still releasing majority of the value to the public in an IPO.