Market to Book Ratio

What is Market to Book Ratio?

The term “Market to Book ratio” refers to the financial valuation metric that is utilized in the evaluation of the current market value of a company relative to its book value. The market value of a company stock basically 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 in case the company liquidates all of its assets and repay all of its liabilities.

Formula

The calculation can be done in two ways –

This ratio can be calculated by dividing the market value of the stock 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 capitalization by the 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 of the company.

The Formula is represented as,

2) Market to Book Ratio Formula = Market Capitalization / Total Book Value
Market-to-Book-Ratio-Formula

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Source: Market to Book Ratio (wallstreetmojo.com)

Steps to Calculate Market to Book Ratio

The formula calculation is done by using the following steps:

Step 1: Firstly, collect the current market value of the stock, 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 net worth of the companyNet Worth Of The CompanyThe 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 total assets of the companyTotal Assets Of The CompanyTotal 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 total book value of the company, 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.

You can download this Market to Book Ratio Excel Template here – Market to Book Ratio Excel Template

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 that are trading at $50 per share. The company reported a net worth of $300,000 on their balance sheet as 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.

Market to Book Ratio Formula

Therefore, market capitalization can be calculated as

Market Capitalization = Current stock price * Number of outstanding shares

= $50 * 10,000

Market to Book Ratio Formula1

Market Capitalization = $500,000

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

Market to Book Ratio Formula1.1png

= $500,000 / $300,000

Market to Book Ratio Formula1.2png

= 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 on March 1, 2019, the current market value of each share of Apple Inc. stood at $174.97 and 4,745,398,000 number of 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.

Example 2

Therefore, market capitalization can be calculated as

Market capitalization  = Current stock price * Number of outstanding shares

= $174.97 * 4,745,398,000

Example 2.1png

Market Capitalization = $830,302,288,060

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

Example 2.2png

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

Example 2.3png

= 7.02

A high ratio simply 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

Market Capitalization
Total Book Value
Market to Book Ratio Formula
 

Market to Book Ratio Formula =
Market Capitalization
=
Total Book Value
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= 0
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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 –

However, the formula also has some limitations, like most other financial metrics.  One of the primary issue with the ratio is that it overlooks the value of intangible assets of a company (such as brand equity, goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more, patent, etc.), which in today’s world are accepted to be really valuable. As such, the ratio is rarely useful for the valuation of a company that has a significant portion of its assets in intangible assets. Examples of such companies can be IT companies or other knowledge-based companies.

Recommended Articles

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

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