The index shows us that all three companies would most likely financially not encounter difficulties; however, Schlumberger Limited. (NYSE:SLB) has a large advantage should things go awry.
Finally, let’s look at the third ratio I’ve chosen.
Tangible book value per share
Tangible book value per share, or TBVPS, is a measurement of the portion of tangible assets (all assets, with the exception of goodwill and items classified as “intangible” on a company’s balance sheet) attributable to each share of the company’s common stock. What this means is that it is helpful in establishing the valuation of a company, and whether or not it may be over or undervalued.
This is important because lots of company’s balance sheets can reflect asset valuations that are inflated by intangibles; yet, if a company were to go bankrupt, the tangible value of assets a company has would be what is left over after bankruptcy.
A simple way to put this would be that tangible book value answers the question, “as a shareholder, what would I receive if the company had to liquidate all of its assets?” By measuring this value per share, we create a ratio that measures valuation.
A TBVPS larger than the current price of the stock means that the stock could be potentially undervalued, whereas, obviously, a TBVPS smaller than the stock could mean that the stock is potentially overvalued. Formulaically, for those who are interested, TBVPS is equal to: (Tangible Book Value – Book Value of Preferred Stock) / Common Shares Outstanding. Now, let’s look at each company’s TBVPS in relation to their stock price.
As you can tell, all three are potentially undervalued. So, which could be the most undervalued? To do this, we can simply divide the TBVPS by the current stock price, where the lowest TBVPS/Price would represent the company potentially the most undervalued.
| TBVPS | Price | TBVPS/Price (valuation) | |
|---|---|---|---|
| Schlumberger | 11.26 | $79.40 | .142 |
| Baker Hughes | 23.47 | $47.96 | .489 |
| Halliburton | 14.71 | $41.90 | .351 |
So, according to this metric, Schlumberger would be the most potentially undervalued. However, the other two boast perfectly respectable TBVPS / Price ratios.
Foolish bottom line
Obviously, there is much more at stake than these three metrics, and no company should be added to a portfolio based on solely these three things. However, these should help as a guideline when deciding between companies in an industry. My hope here was to help introduce you to a few not-so-common ways to evaluate a company that are still very useful.
So, in the end, who won? Well, Schlumberger Limited. (NYSE:SLB) won two out of our three “contests,” putting them in the lead, with Halliburton Company (NYSE:HAL) winning the other and Baker Hughes unfortunately going home with nothing. That certainly isn’t a knock against Halliburton or Baker Hughes; they just didn’t come out on top with the criteria with which I evaluated the industry.
The article The Oil-Field-Service Industry, According to Three Key Ratios originally appeared on Fool.com and is written by Michael Nolan.
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