Like getting sufficient sleep, avoiding social media, and constructing self-driving automobiles, shopping for shares beneath their intrinsic worth is simpler mentioned than completed. Nevertheless it doesn’t should be unattainable.

For instance, shares in Lloyds Banking Group (LSE:LLOY) have climbed 50% over the past 12 months and now commerce above the ebook worth of the underlying enterprise. So is the inventory nonetheless low-cost?

A outcomes enterprise

The Lloyds share price bought a lift on Thursday (20 February) when the financial institution launched its newest outcomes. Income may need been down, however traders had been impressed with the broader information.

Pre-tax earnings fell 19% within the final three months of 2024. However this was partly as a result of financial institution setting apart £700m for potential motor mortgage liabilities.

On the constructive facet, lending margins expanded barely throughout the quarter and Lloyds introduced a dividend of two.11p. By itself, that’s simply over 3% of the present share price. The financial institution additionally introduced plans to spend £1.7bn on buybacks – sufficient to scale back the share rely by 4.25% at present ranges.

All of this meant the inventory went up over 5% in a day.

E book worth

In doing so, Lloyds shares began buying and selling at a price-to-book (P/B) ratio above 1. That’s the primary time this has occurred since 2019. 

When a inventory trades beneath the ebook worth – the distinction between belongings and liabilities – of the underlying enterprise, traders have a margin of security. Not less than, they do in idea. 

On paper, an organization whose shares commerce beneath ebook worth might unload its belongings, pay down its money owed, and provides traders greater than the share price in money. That will be a great outcome.

Realistically, with a financial institution like Lloyds, this has at all times been unlikely. However with a rising share price which means even that theoretical margin of security has gone, is the inventory now a giant danger? 

Dangers

The massive uncertainty with Lloyds shares in the meanwhile is the continuing investigation into motor loans. The financial institution’s now put aside a complete of £1.2bn to cowl potential liabilities.

There’s no assure, nonetheless, that this can be sufficient. I’ve seen estimates that the ultimate complete could possibly be nearer to £3.9bn – greater than triple the corporate’s at present planning for.

The Supreme Courtroom is ready to rule on the problem in April. However we don’t have any particular details about what the result of the continuing investigation is more likely to be. That makes me very cautious of making an attempt to anticipate it.

If issues go nicely, the inventory could possibly be set for an additional massive carry, however it’s a giant danger, from my perspective.

Investing rules

By itself, the very fact Lloyds shares are buying and selling above the agency’s ebook worth doesn’t put me off. I don’t suppose the prospect of the financial institution liquidating all of its belongings was ever actually on the playing cards.

A better share price nonetheless, does improve the general danger with the inventory. And it means I’m not keen to purchase it at at the moment’s costs – although I most likely ought to have completed so a 12 months in the past.