Is it game over for one of investing’s magic numbers?
A quick reminder
Whilst the theory is neat, critics say the ratio is fundamentally flawed in today’s markets. They cite several problems;
- It doesn’t work where you have a firm, such as McDonalds, that has a negative net book value
- The failure of value firms to deliver outperformance, despite being supposedly cheap by this measure, points to its irrelevance
- It suffers from three technical drawbacks as a measure; an inability to deal with intangible assets, research and development costs and share buybacks