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The market to book ratio also called the price to book ratio is a financial valuation metric used to evaluate a company s current market value relative to its book value.
Market to book value ratio interpretation. A ratio below 1 indicates that it may be undervalued. It portrays the relationship between what the market perceives the value of a company s equity to be and the actual book value of its equity. The market to book ratio is a valuation metric used to compare the price of a stock to its book value. You can calculate the market to book ratio by dividing a company s market cap by its book value.
The p b ratio measures the market s valuation of a company relative to its book value. Price book value ratio is an investment valuation ratio used by investors or finance providers to compare market value of a company s shares to its book value shareholder equity. The market to book financial ratio equals the market value of the company divided by its book value. In other words it suggests how much investors are paying against each dollar of book value in the balance sheet.
The market value is the current stock price of all outstanding shares i e. The formula is represented as 2 market to book ratio formula market capitalization total book value. A market to book ratio above 1 means that the company s stock is overvalued. It is also called the price to book p b ratio.
The reverse is the case for the book to market ratio. Interpretation of p b value ratio as mentioned previously the price to book ratio is utilised by value investors to ferret out company stocks that are undervalued. The book value is calculated by subtracting a company s liabilities from its assets. This ratio indicates how much shareholders are contributing paying for a company s net assets.
Normally a company s share value will be greater than its book value because the share price takes into account investors estimate of the profitability of the company how well it uses its assets and includes best guesses of the future value of the company. The market value of equity is typically higher than the book value of a company p b ratio is used by value.
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