# What is a transit business

## What is the book value ???

This is how you classify book value and P / E ratio

by Dr. Steve Sjuggerud

Let's take a look at a real-life t-shirt company called Quicksilver (ZQK) that is publicly traded. We want to analyze whether it is being traded cheaply or dearly relative to history and current estimates.

Quicksilver balance sheet:

Total assets \$ 451 million

Total debt \$ 178 million

Equity \$ 273 million

Quicksilver price / earnings ratio:

Sales \$ 705 million

Spending \$ 667 million

Profit \$ 38 million

The first number we need to determine is market value, also called market capitalization. We get this value by multiplying the share price by the number of shares.

To put it simply, let's say the price of Quicksilver stock is \$ 20 and there are 40 million shares traded in the market. This gives us a market value of \$ 800 million.

So if Quicksilver is valued at \$ 800 million by the market, does that mean Quicksilver is expensive or cheap?

Let's see ... first, let's look at the price-to-book ratio. The book value corresponds to the net assets. Therefore the following results for the price-to-book value ratio:

Quiksilver price-to-book ratio: \$ 800 million: \$ 273 million = 2.9

Given the price-to-book ratio, Quicksilver looks a bit expensive. Remember, companies sell below book value during bad times. And that in good times they are sold at double book value. So, if you see Quicksilver selling for almost three times book value, you are also likely to conclude that Quicksilver stock is expensive based on that measure.

Now let's take a look at the profits.

Quicksilver's price / earnings ratio: \$ 800 million: \$ 38 million = \$ 21

Given the price / earnings ratio, Quicksilver also looks expensive if we stick to the historical benchmark that 15 is "reasonable".

That's it! Now you've just appreciated a company's worth! As a general rule, companies that trade below book value and less than 10 times their profits are very cheap. And companies that are twice their book value and more than twenty times their profits are very expensive.