But of course, the market to book ratio cannot be used as a standalone metric and must be used in conjunction with various other financial ratios to support an investment thesis. Conversely, the market to book ratio can be calculated using the same metrics, expressed on a per-share basis. The book-to-market ratio is also a valuation metric used to see how a company’s market value compares to its book value. In fact, the book-to-market ratio is just the inverse of the market-to-book ratio.

In contrast, stable industries like utilities or manufacturing may display lower ratios, reflecting steady growth prospects. Investors need to contextualize the market to book ratio within the industry landscape for accurate insights. In the next step, we’ll calculate Apple’s book value of equity (BVE) by subtracting its total liabilities from its total assets, per its latest reported balance sheet for fiscal year ending 2022. If the market value of a company is trading higher than its book value per share, it is considered to be overvalued.

Formula and Calculation of the Price-to-Book (P/B) Ratio

The market-to-book ratio is a metric that assesses whether a stock is over or undervalued. Investors can use the market-to-book ratio to determine whether a stock is over or undervalued. A high ratio indicates overvaluation, while a low ratio indicates undervaluation. However, when accounting standards applied by firms vary, P/B ratios may not be comparable, especially for companies from different countries. For example, in most cases, companies must expense research and development costs, reducing book value because this includes the expenses on the balance sheet.

The market-to-book ratio is a quick way to tell whether a company’s stock is over or undervalued. However, it’s wise to also examine other metrics before forming an opinion and to compare a company’s market-to-book ratio to that of its peers. The market-to-book ratio, or price-to-book ratio, is one of the most commonly used ratios to determine whether a company’s stock is under or overvalued. So-called value stocks often have a low market-to-book ratio, which indicates that you can buy the stock for a low price relative to the value of its assets.

Conversely, a ratio less than one may imply undervaluation or challenges the market has factored into its valuation. The book value of a market to book ratio firm is its historical cost or accounting value calculated from the company’s balance sheet. Book value can be calculated by subtracting total liabilities, preferred shares, and intangible assets from the total assets of a company. In effect, the book value represents how much a company would have left in assets if it went out of business today. Some analysts use the total shareholders’ equity figure on the balance sheet as the book value.

The Market-to-Book Ratio or Price-to-Book Value Ratio compares a company’s market capitalization to its book value. In simple terms, it’s a ratio that compares the market’s valuation of a company to its actual worth as indicated by its financial statements. It is hence, best suited for companies with real assets in books such as insurance, banking, REITs, etc. Hence, while making any investment decisions, it is essential to consider other ratios and the underlying fundamental variables. As of March 1, 2019, the current market value of each share of Apple Inc. stood at $174.97 and 4,745,398,000 outstanding shares.

Tangible vs. Intangible Asset

It’s calculated by dividing the market cap by the book value, showing you how the market value compares to the value as listed on financial documents. Therefore, value investors typically look for companies that have low price-to-book ratios, among other metrics. A high P/B ratio can also help investors identify and avoid overvalued companies.

Industries like consumer goods or healthcare might show intermediate ratios, reflecting a balance between tangible assets and market-driven valuations. Companies within these sectors may benefit from strong brand equity or innovative product pipelines, influencing their market to book ratios. Additionally, P/B ratios can be less useful for service and information technology companies with little tangible assets on their balance sheets. Finally, the book value can become negative because of a long series of negative earnings, making the P/B ratio useless for relative valuation. Thus, the ratio isn’t forward-looking and doesn’t predict or indicate future cash flows.

Example market-to-book ratio calculation

Market value per share is obtained by looking at the information available on most stock tracking websites. You need to find the company’s balance sheet to obtain total assets, total liabilities, and outstanding shares. Most investment websites display this financial report under a “financials” tab—some show it on a stock’s summary tab. A company’s book value is its total assets minus both intangible assets and total liabilities. Book value per share is this number divided by the number of outstanding shares.

1. Hence, while making any investment decisions, it is essential to consider other ratios and the underlying fundamental variables.
2. In theory, a low price-to-book-value ratio means you have a cushion against poor performance.
3. A high P/B ratio can also help investors identify and avoid overvalued companies.
4. Ultimately, firms with high unaccountable intangible assets will tend to have high Market to Book ratios.

Let’s consider an example using XYZ Corp, a technology company listed on the stock exchange. Alex, an investor, is analyzing whether to invest in XYZ Corp based on its market-to-book ratio. XYZ Corp currently has 15,000 outstanding shares, with each share priced at $40. According to its most recent financial statement, XYZ Corp’s net worth, or total book value, stands at $450,000. However, a good market to book ratio also has limitations, like most other financial metrics. As such, the ratio is rarely useful for the valuation of a company with a significant portion of its assets in intangible assets.

The market value is the price that investors are willing to pay to acquire or sell the stock in the secondary markets. Since it is determined by supply and demand in the market, it does not always represent the actual value of a firm. First, calculate the book value per share, which is in the denominator of the P/B ratio formula. As stated earlier, we know that book value equals a company’s total assets minus its liabilities. To arrive at book-value-per share, divide the book value by the number of shares outstanding, as shown in the formula below. A company’s price-to-book ratio is the company’s current stock price per share divided by its book value per share (BVPS).