Book-To-Market Ratio - Explained
What is Book to Market Ratio?
Written by J. Mance Gordon
Updated at April 18th, 2024
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What is Book-to-Market Ratio?
The book-to-market ratio is a ratio used to determine the value of a company by comparing its book value to its market value. The market value of a company is derived from the value (price) of its stock in the market. The book value is the accounting value of the company as stated in the balance sheet. The calculation of the book value-to-market ratio is based on either.
Book-to-market ratio = book value of firm / market value of firm
Or
Book-to-market ratio = common shareholders equity / market capitalization
What is the Book-to-Market Ratio?
The firms book value is calculated using the data from the company balance sheet. The book value is either accounting value or historical cost. Book value can be determined by the subtraction of total liabilities, preferred shares, and intangible assets from the company's total assets. This means book value is the residual value of a company after it is wound up (shut down and sold off). Sometimes, some analysts use the capital value in the balance sheet as book value. The market value of a publicly-traded stock is determined by multiplying its total number of outstanding shares by the existing share price. The book-to-market ratio helps to identify the overvaluation or undervaluation of a firm's securities. Any ratio above one indicates undervaluation of a stock, while any ratio below one shows overvaluation. The inverse of this ratio is the market-to-book ratio, also known as the price to book ratio.
Related Topics
- Trend Analysis of Financial Statements
- Common-Size Analysis (Vertical Analysis) of Financial Statements
- Common-Size Financial Statement
- Net Dollar Retention
- Horizontal Analysis
- Per Share Basis
- Profitability Ratios
- Gross Margin Ratio
- Profit Margin
- After Tax Profit Margin
- Return on Assets
- Total Shareholder Return
- Cash on Cash Return
- Earnings Per Share
- Diluted Earnings Per Share
- Asset Turnover Ratio
- Berry Ratio
- Break-Even Analysis
- Liquidity Ratio
- Current ratio (Working Capital Ratio)
- Working Ratio
- Quick Ratio
- Quick Assets
- Days Sales Outstanding
- Cash Ratio (Operating Cash Flow Ratio)
- Receivables turnover ratio (often converted to average collection period)
- Accounts Payable Turnover Ratio
- Inventory turnover ratio (often converted to average sale period)
- Solvency (Coverage Ratios)
- Leverage Ratio (Debt Ratio)
- Asset Coverage Ratio
- Debt to Equity
- Debt to Income Ratio
- Debt Coverage Ratio
- Times Interest Earned
- Market Capitalization
- Price to Equity Ratio
- Book-To-Market Ratio
- Price to Earnings Ratio
- Price to Earnings Growth (PEG) Ratio
- Price to Earnings Growth Payback Ratio
- CAPE Ratio
- Price to Cash Flow Ratio
- Capital Maintenance
- Book to Bill Ratio
- Asset Turnover Ratio
- Plowback Ratio
- Days Inventory Outstanding
- Days Payable Outstanding
- Days Sales Outstanding
- Non-financial Performance Measures: The Balance Scorecard