Book to Market Ratio
The book-to-market ratio measures a firm’s book value relative to its market value. There are two ways to calculate the book-to-market ratio:
Book-to-market Ratio= Book Value Per Share / Stock Price
Book to Market Ratio= Book Value / Market Capitalization
where:
market capitalization = stock price * number of common shares outstanding
book value = tangible book value
Value investors look for companies with a book-to-market ratio higher than one (the higher the book-to-market ratio, the better). They do this because the tangible book value is theoretically the amount that common shareholders would receive if all the company’s hard assets were sold for their book values and the company’s debts were paid. Thus, a book-to-market ratio greater than one implies that the liquidation value of a company's net assets exceeds the company's current market value. It would thus be a bargain to purchase a company for a price that is less than the value of its net assets.
Note that the book-to-market ratio is the inverse of the price-to-book ratio (p/b ratio).
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