Three Penny Stock Myths

MYTH NO 1: STOCKS TRADING BELOW BOOK VALUE ARE CHEAP

Book value (BV) is the actual worth of a stock as in a company’s books/balance sheet, or the cost of an asset minus accumulated depreciation. BV depends more on historical cost and depreciation and often has little correlation to the current share price.

Shares of industries that are capital intensive trade at lower price/book ratios, as they generate lower earnings. On the other hand, those business models that have more human capital will fetch higher earnings and will turade at higher price/book ratios. “Price/book (ratio) of below 1 may be cheap but one should see other aspects such as earnings forecast, guidance, management and debt on the books of the company,” says Angel Broking’s equity derivatives head Siddarth Bhamre.

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