In my opinion a EV to book value is a more accurate measurement of valuation of LGIH compared to P/B value. They have significantly increased their leverage, inflating EV. What are your thoughts on this?
Hello Degen, thank you for the great question. I hope I understood it well and am answering to what you mean exactly.
The reason to commonly use price to book here, is that the company will at some point sell the assets it has and pay down the liabilities, and so the investor is left with the equity or book value.
Using EV for this, I think has a drawback in that EV= market cap - cash + liab., so it would add the liabilities, and we would observe that in this case:
EV per share > price per share > BVPS
The higher EV means that the company has more liabilities than cash, which doesn't directly lead to a conclusion on valuation
Price to book has many flaws, I think most importantly it doesn't take into account how fast the company will liquidate its assets and what their price appreciation will be in the meantime. So it doesn't consider what's the compounding rate of the book value itself until liquidation. Secondly, liquidation is just a fictitious scenario here, although it gradually rolls into reality as homes get built on the land the company has, specially given how they want to reduce that asset base.
So it has many flaws but it also does have a clear tangible long term pull in my opinion, where the stock long term will trade between 0.75x and 2.25x book
Thanks for taking your time to answer my concerns.
While researching the company I did some quick back of the napkin math. I came to the same conclusion as you, that the P/B is compressed, but it doesn’t take into account the increased leverage ratio.
By comparing the historical EV to book value i believe we get a more accurate picture of future returns for investors. This ratio is still historically compressed, just a lot less than the P/B value.
Less of the future price appreciation will got to the investor, and at some point be used for deleveraging the balance sheet.
What is driving the BVPS increase? If they remarked asset prices based on peak selling value then might not be such a discount to "true" BV.
Compelling opportunity as there's still a large gap in needed homes since 2008 so its not like demand is going to disappear (only hides when rates are high)
In my opinion a EV to book value is a more accurate measurement of valuation of LGIH compared to P/B value. They have significantly increased their leverage, inflating EV. What are your thoughts on this?
Hello Degen, thank you for the great question. I hope I understood it well and am answering to what you mean exactly.
The reason to commonly use price to book here, is that the company will at some point sell the assets it has and pay down the liabilities, and so the investor is left with the equity or book value.
Using EV for this, I think has a drawback in that EV= market cap - cash + liab., so it would add the liabilities, and we would observe that in this case:
EV per share > price per share > BVPS
The higher EV means that the company has more liabilities than cash, which doesn't directly lead to a conclusion on valuation
Price to book has many flaws, I think most importantly it doesn't take into account how fast the company will liquidate its assets and what their price appreciation will be in the meantime. So it doesn't consider what's the compounding rate of the book value itself until liquidation. Secondly, liquidation is just a fictitious scenario here, although it gradually rolls into reality as homes get built on the land the company has, specially given how they want to reduce that asset base.
So it has many flaws but it also does have a clear tangible long term pull in my opinion, where the stock long term will trade between 0.75x and 2.25x book
Thanks for taking your time to answer my concerns.
While researching the company I did some quick back of the napkin math. I came to the same conclusion as you, that the P/B is compressed, but it doesn’t take into account the increased leverage ratio.
By comparing the historical EV to book value i believe we get a more accurate picture of future returns for investors. This ratio is still historically compressed, just a lot less than the P/B value.
Less of the future price appreciation will got to the investor, and at some point be used for deleveraging the balance sheet.
What is driving the BVPS increase? If they remarked asset prices based on peak selling value then might not be such a discount to "true" BV.
Compelling opportunity as there's still a large gap in needed homes since 2008 so its not like demand is going to disappear (only hides when rates are high)
Great question. They keep the assets at the lowest of historical cost and net realisable value so they are not marked to peak valuations
Take a look at GRBK https://jaimebermejo.substack.com/p/kyivstar-q3-2025-results
How confident are you in the book value estimation? Is it likely to be impaired?