Why should investor not consider the book value of a share ?

The price of share is derived from its future earning prospects both in the hands of the company and in the hands of the share holder (in form of dividends, buy back etc). Book value represents the historical value recorded in the books of the company.  A share with low price to book value ratio does not mean that the share is cheap. In my previous post, I have discussed about the factors to be considered by long term investor while investing in a share. http://rvinay.blogspot.in/2015/06/factors-to-be-considered-while.html . 

Here is the list of few shares with high price to book value ratio.

S. No.	Name	CMP*	BV	P/BV	ROCE %	DP Ratio %
1	Nestle	6144	294.27	20.88	62.75	51.27
2	Dabur	282.5	10.84	26.06	43.24	46.06
3	Britannia	2731.55	123.1	22.19	66.2	38.91
4	Colgate	2055.2	85.21	24.12	101.3	58.38
5	HUL	918.3	15.15	60.61	148.75	75.2
6	Asian Paints	760.8	44.1	17.25	46.31	44.08
7	Eicher Motors	20352.35	454.53	44.78	64.82	24.24
8	Ajanta Pharma	1584	89.41	17.72	55.8	17.24
9	Page Industries	15074.49	434.85	34.67	75.64	43.51
10	Symphony	2131.4	66.54	32.03	58.27	45.99

Below is the list of few shares with low price to book value ratio.

S. No.	Name	CMP*	BV	P/BV
1	RIL	1005	739	1.36
2	ONGC	313.9	201.22	1.56
3	Hindalco	113.05	196.6	0.58
4	Tata Steel	306.95	376.91	0.81
5	Gitanjali Gems	40.00	189.31	0.21
6	Bank of India	179.85	449.87	0.40

CMP	NSE price as on 1/7/2015
BV	Book Value
P/BV	Price to Book Value Ratio
ROCE	Return on Capital Employed
DP Ratio	Dividend Payout Ratio

Source - Moneycontrol.com

If you compare both the type of shares, you will find that the expensive share is becoming more and more expensive. I have discussed the reasons for such a high valuations in my previous blog. http://rvinay.blogspot.in/2015/06/why-do-some-shares-command-high.html

Here are few possible reasons for high book values.

1. In the past, the company may be a part of M&A exercise. The high reserves may have been created out of that exercise.

2. The assets shown by the company may not be realisable.

3.The company is not an investor friendly company and its Dividend Payout ratio is low.

4. Company is investing its earnings in the projects with high gestation period. 

Generally retail investor think that the high book value is a safeguard against any fall. It would act as a base for the share price which is not the case. If P/BV ratio of a share is low, there must be some reason this (mentioned above).  The investor should understand that the book value is not going be his.He will be getting dividend and capital appreciation which has no relation to the book value.