Book to Market Ratio

What is the Book to Market Ratio?

The book to market ratio is a relative valuation ratio which divides the book value of a company by the market value.  The ratio is meant to provide an indication of valuation.  It is commonly believed a book to value ratio above 1 suggests that the company is undervalued while a ratio above 1 suggests that it is overvalued due to the fact that the companies assets are worth less than its market value

The book value and market value of a company can be located on the balance sheet of a company.

Book to Market Ratio Calculation

Disadvantages of the Book to Market Ratio

The book to market ratio is not as widely used as it once was.  The reason for this is that it has not adapted to the new marketplace of the last ten years.  The internet boom has spawned a new age where knowledge is capital and this intangible asset is found nowhere on the balance sheet; thereby understating the companies book value.  Remember, the book value of a company is calculated by subtracting liabilities and intangible items from Assets while the market value of a company reflects future expectations, including intangible items like goodwill, trademarks, and knowledge capital.