Many financial portal websites show the price-to-book (P/B) ratio of companies. For example, Yahoo Finance shows this P/B ratio for TotalEnergies SE:
Under IFRS (IAS 16 — Property, Plant and Equipment), a company can choose to state the value of property, plant and equipment in the balance sheet using either the "cost model" (historical cost minus depreciation and impairment), or the "revaluation model" (fair value minus depreciation and impairment). It is allowed to account for one class of asset using the "cost model" and another class of asset using the "revaluation model".
Under US GAAP, companies use historical cost minus depreciation and impairment.
These accounting rules seem to affect the relevance of the book value and hence the price-to-book ratio. Historical cost often differs from fair value, so book value based on historical cost may not be relevant. When companies have the choice to use either historical cost or fair value at their own discretion, the book values are somewhat arbitrary ... There's also the issue of comparability across companies. For example, Company A and Company B each bought a piece of land for $100,000. The piece of land is their only asset. They have no liabilities. Each piece of land is now worth $200,000.
Company A uses the "cost model". The land is carried on the balance sheet at $100,000. If the market capitalization of the company is $200,000, then the P/B ratio is 2.00.
Company B uses the "revaluation model". The land is carried on the balance sheet at $200,000. If the market capitalization of the company is $200,000, then the P/B ratio is 1.00.
Given the problems I mentioned above, how is the price-to-book ratio relevant to the investor?