One metric for estimating a company's value is the book-to-market ratio. The ratio contrasts the market value and book value of a company. The historical cost, or accounting value, of a corporation is used to determine its book value. The market capitalization of a company, which is the sum of its share price on the stock market and the number of outstanding shares, determines the market worth of that company.
Book-to-market ratio
Book-to-market compares book value to market value. Assets minus liabilities equal book value. A company's market value is its share price multiplied by its outstanding shares. Book-to-market ratio helps investors value a company.
What Does Book-to-Market Mean
If a company's market value exceeds its book value per share, it's overvalued. Analysts consider a corporation undervalued if its book value exceeds its market value. Book-to-market ratio compares a company's book value to its market value.
The book value of a company is its historical cost or accounting value from the balance sheet. Book value is a company's total assets minus its liabilities, preferred shares, and intangible assets. Book value is the amount of assets a firm would have if it closed today. Some analysts use shareholders' equity as book value.
Market capitalization is the total number of a company's outstanding shares multiplied by its current share price.
Market value is the price investors are willing to pay for a stock in secondary markets. Since it's based on supply and demand, it doesn't always reflect a company's value.
Book-to-market ratio
Book value divided by market value reveals undervalued or overvalued equities. The ratio compares a company's market value and actual value. This ratio helps investors and analysts distinguish between a company's genuine value and investor speculation.
A stock is undervalued if its ratio is above 1. The stock is overvalued if it's below 1. Above 1 indicates a company's stock price is below its assets value. Value managers appreciate a high ratio since it indicates the firm is trading inexpensively relative to its book value.
A book-to-market ratio below 1 means investors are willing to pay more than net assets are worth. This could mean the company has solid earnings predictions and investors are willing to pay more. Companies with few physical assets tend to have a low book-to-market ratio.
Book-to-market vs. market-to-book ratio
Market-to-book is the opposite of book-to-market. It compares the market price of all outstanding shares to the company's net assets to determine if a company's stock is over or undervalued.
Above 1 suggests the stock is overvalued. Below 1 suggests undervaluation; above 1 indicates overvaluation. Either ratio can compare a company's book and market value.