The market to book financial ratio, also called the price to book ratio, measures the market value of a company relative to its book or accounting value. The market value of the company is its value at any point in time as determined by the financial marketplace. The book value, or historical value, is almost always lower than the market value since some assets may be off-balance sheet items.
The market value and book value of liabilities tend to be closer in value than the market value and book value of assets. This is because liabilities that are due in one year, or current liabilities, usually retain their book value.
Conversely, the market and book value of equity tends to be widely diverse since equity is not due in one year,
How is the Market to Book Ratio Used
The market to book ratio is used by security analysts to determine if a stock is undervalued or overvalued. If a stock is undervalued, the price is expected to rise. If it is overvalued, the price is expected to fall. Investors looking for value stocks often look for low market to book companies. Market to book looks at the value the market places on the book value of a company.
Calculation of Market to Book Ratio
Here is how you calculate the market to book financial ratio:
Market to book = Share price of the stock/Book value per share