What is the Market to Book Ratio?

The term “Market to Book ratio” refers to the financial valuation metric utilized to evaluate the current market value of a company relative to its book value. The market value of a company stock refers to the current stock price of all its outstanding shares.Outstanding Shares.Outstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more

On the other hand, the book value of a company is the net amount left if the company liquidates all of its assets and repays all of its liabilities.

Formula

The calculation can be done in two ways –

This ratio can be calculated by dividing the stock’s market value by the book value per share of the company. Mathematically, it is represented as,

  1. Market to Book Ratio formula = Market value of stock / Book value per share

On the other hand, it can also be calculated by dividing the market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more by the company’s total book value or tangible net worthTangible Net WorthTangible Net Worth is a company’s total net worth minus the value of its intangible assets such as copyrights, company goodwill, and patents, among other things. Total Assets – Total Liabilities – Intangible Assets = Tangible Net Worthread more.

The Formula is represented as,

  1. Market to Book Ratio Formula = Market Capitalization / Total Book Value

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Steps to Calculate Market to Book Ratio

The formula calculation is done by using the following steps:

Step 1: Firstly, collect the stock’s current market value, which is easily available from the stock market. Now, collect the number of outstanding shares of the company and determine the market capitalization by multiplying the current stock price and the number of outstanding shares.

Market capitalization = Current stock price * Number of outstanding shares.

Step 2: Next, determine the total book value or the comapny’s net worthComapny’s Net WorthThe company’s net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company’s share capital (both equity and preference) as well as reserves and surplus.read more from its balance sheet. Net worth can be computed by deducting total liabilities, preferred stock, and intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more from the company’s total assetsThe Company’s Total AssetsTotal Assets is the sum of a company’s current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more.

Total book value = Total assets – Total liabilities – Preferred stock – Intangible assets

Step 3: Finally, the calculation can be completed by dividing the market capitalization by the company’s total book value, as shown below.

Market to Book ratio = Market capitalization / Total book value

Examples of Market to Book Ratio  (with Excel Template)

Let’s see some simple to advanced examples to understand it better.

Example#1

Let us take the example of David, who intends to invest in the furniture company ABC Ltd, which is a publicly-traded company. ABC Ltd has 10,000 outstanding shares trading at $50 per share. The company reported a net worth of $300,000 on its balance sheet on the last day of the previous accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more. Calculate the market to book ratio for ABC Ltd.

Given, Total book value = $300,000

Below is the data for the calculation of ABC Ltd.

Therefore, market capitalization can be calculated as

Market Capitalization = Current stock price * Number of outstanding shares

= $50 * 10,000

Market Capitalization = $500,000

Therefore, the ratio for ABC Ltd can be calculated as,

= $500,000 / $300,000

= 1.67

A ratio of more than one indicates that the investors value the company more than its book value.

Example#2

Let us now take the example of Apple Inc. 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. The latest reported net worth of the company stood at $118,255,318,160. Calculate the market to book ratio for Apple Inc.

Given, Total book value = $118,255,318,160

Below is data for the calculation of Apple Inc.

Market capitalization  = Current stock price * Number of outstanding shares

= $174.97 * 4,745,398,000

Market Capitalization = $830,302,288,060

Therefore, the ratio for Apple Inc. can be calculated as,

= $830,302,288,060 / $118,255,318,160

= 7.02

A high ratio justifies the investors’ confidence in the brand of Apple Inc. and its future growth prospects.

Market to Book Ratio Calculator

You can use the below Formula Calculator

Interpretation

From the perspective of investors, a formula is a very important ratio because it helps them to decide whether a stock is overvalued or undervalued –

  • If the ratio is less than one, then it could indicate that the stock is undervalued, in which case it can be seen as a good investment because the stock price is expected to bounce back.If the ratio is greater than one, then it could mean that the stock is overvaluedStock Is OvervaluedOvervalued Stocks refer to stocks having more current market value than their real earning potential or the P/E Ratio. Overvaluation of stocks might occur due to illogical decision making or deterioration in a Company’s financial health. read more, in which case it might not be a very good investment because the high price might not be backed by a strong company perspective, although it might not always be true.

This article is a guide to the Market to Book Ratio. Here we learn how to calculate the Market Book Ratio using its formula, examples, and interpretation. You can learn more about accounting from the following articles –

  • Cape RatioCape RatioCape ratio is a PE valuation multiple calculated using earnings per share adjusted for cyclical changes in economy and inflation. It gives the investor an idea of whether the markets are overvalued or undervalued by analyzing the impact of the economic situation on the PE ratio.read morePrice to Book Value RatioPrice To Book Value RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share
  • read moreAsset Coverage RatioAsset Coverage RatioAsset Coverage Ratio is a risk analysis multiple that depicts the company’s ability to repay the debt by selling off the assets and outlines how much of the monetary and tangible assets are available against the debt. It helps an investor to predict the future earnings and gauge the risk involved in the investment.read moreNet Book Value CalculationNet Book Value CalculationNet book value refers to the carrying value of the corporate assets acquired after accounting for depreciation, as reported in the company’s balance sheet. An asset’s net book value is calculated as “Net Book Value = Original Purchase Cost – Accumulated Depreciation”.read more