What is the market-to-book ratio?
The market to book ratio is a metric used to evaluate the price of a company relative to the value of its assets. It is calculated by dividing a company’s market value by its book value. A high market to book ratio indicates that the company or stock is overvalued, while a low ratio indicates that the company is undervalued.
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 its intrinsic value.
The market to book ratio is identical to the price to book ratio, or PB ratio.
The formula to calculate market to book ratio is very simple. You simply divide a company’s market capitalization by its total book value.
You can also calculate it by dividing the share price with the book value per share.
In these calculations, book value = total assets – total liabilities. You can find these numbers on the company’s balance sheet. Book value is sometimes referred to as shareholders’ equity.
How to use the market to book ratio
The market to book ratio, or PB ratio, is one of the most commonly used ratios to determine if a company’s stock is expensive or cheap. For example, a ratio below 1 indicates that the stock is cheap, while a high ratio indicates that it is expensive.
A market to book ratio of less than 1 implies that, theoretically, you are able to buy the company for less than its assets are worth. So if you were to buy the company, liquidate it and sell its assets on the market, you would make a positive return on your investment.
However, keep in mind that a low or high ratio should not be used in isolation to evaluate a stock. When companies are trading for less than their book value, then they are usually cheap for a reason.