Book to Market Ratio What Is It, Formula, Example

Investors find the P/B ratio useful because the book value of equity provides a relatively stable and intuitive metric they can easily compare to the market price. To calculate the P/B ratio, the market price of the stock is divided by the book value per share. Book value ignores intangible assets such as a company’s brand name, goodwill, patents, and other intellectual property. That means it does not carry much meaning for service-based firms with few tangible assets.

If the book value is higher than the market value, analysts consider the company to be undervalued. The book-to-market ratio is used to compare a company’s net asset value or book value to its current or market value. You can find total assets and liabilities listed on a company’s balance sheet. The book value may also be shown on the balance sheet, under shareholders’ equity. The market-to-book ratio is a valuation metric used to assess whether shares of stock are over or undervalued. The P/B ratio can also be used for firms with positive book values and negative earnings since negative earnings render price-to-earnings ratios useless.

This ratio is calculated by dividing the company’s current stock price per share by its book value per share (BVPS). The market price per share is simply the current stock price that the company is being traded at on the open market. We first subtract the total liabilities from the total assets and divide the difference by the total number of shares outstanding on that date. In other words, it’s a calculation that measures the difference between the book value and the total share price of the company.

1. A company’s price-to-book ratio compares the market price of its shares to the book value of each share, where the book value is based on the company’s asset sheet.
2. Investors use both of these formats to help determine whether a company is overpriced or underpriced.
3. The real purpose of it is to give investors a rough idea as to whether the sale price is close to what it should be.

It is a good criteria to compare peer companies and judge their performance within the same sector. It gives an idea whether the stock has potential to grow even though being undervalued. But market to book ratio analysis cannot be the only factor for investment decision because a stock may have a high ratio not only due to high market price but also due to low tangible assets. The market to book ratio varies significantly across industries, offering insights into sector-specific dynamics. Technology companies, characterized by high innovation and rapid growth, typically exhibit higher ratios. This reflects the market’s anticipation of future earnings and the value placed on intangible assets like patents and proprietary technology.

The book-to-market ratio compares a company’s book value with its market value. The market value of a company is the market price of one of its shares multiplied by the number of shares outstanding. The book-to-market ratio is a useful indicator for investors who need to assess the value of a company. This comparison demonstrates the difference between the market value and book value of a company. The market-to-book ratio, also called the price-to-book ratio, is the reverse of the book-to-market ratio. Like the book-to-market ratio, it seeks to evaluate whether a company’s stock is overvalued or undervalued by comparing the market price of all outstanding shares with the net assets of the company.

What Does Price-to-Book Ratio Compare?

Additionally, the market-to-book ratio is not a good way to value all types of businesses, as some types of companies don’t need a lot of physical assets to make money. Moreover, when companies are trading for less than their book value, there’s usually a reason. Likewise, companies with a high market-to-book ratio may be expensive for a reason — for example, they could be expected to make a lot of profits in the future. A high market-to-book ratio indicates that a stock is expensive, or overvalued, while a low ratio indicates that it is cheap, or undervalued.

P/B Ratios and Public Companies

In other words, the stock price would be considered fairly valued, strictly from a P/B standpoint. A company with a high P/B ratio could mean the stock price is overvalued, while a company with a lower P/B could be undervalued. Naturally then, if the assets can be accounted for, then the book values will show it. As a result, the book values will tend to be closer to the market price or the economic reality. It is always recommended to use other fundamental variables while interpreting a ratio. These fundamental variables could be growth rate, return on equity, payout ratio, or the expected risk in the company.

Criticisms of Price-to-Book (P/B) Ratio

Many investors rephrase this equation to form the book to market ratio formula by dividing the total book value of the firm by the total market value of the company. Since market value includes profitability, intangibles, and potential for future market to book ratio growth, it frequently exceeds a company’s book value. Therefore, the net asset value investors receive when they purchase a share is measured using book value per share.

Growth Stocks

The book-to-market ratio identifies undervalued or overvalued securities by taking the book value and dividing it by the market value. The ratio determines the market value of a company relative to its actual worth. Investors and analysts use this comparison ratio to differentiate between the true value of a publicly traded company and investor speculation. This valuation metric compares a stock’s market value to its book value, which is the value of its assets minus its liabilities. High-growth companies often show price-to-book ratios well above 1.0, whereas companies facing financial distress occasionally show ratios below 1.0. Another valuable tool is the price-to-sales ratio, which shows the company’s revenue generated from equity investments.