Book to Market Ratio - Explained
What is the Book to Market Ratio?
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What is the Book-to-Market Ratio?
The book-to-market ratio is a ratio used to determine the value of a company by comparing its book value to its market value. The market value of a company is derived from the value (price) of its stock in the market while the book value is the accounting value of the company as stated in the balance sheet. The book-to-market ratio is estimated by comparing both the market and book value of a firm.
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How Does the Book to Market Ratio Work?
The book-to-market of a company tells an investor whether a particular company is underpriced (undervalued) or overpriced (overvalued). A company is overvalued when its market value is higher than its book value and when the book value is higher than the market value, the company is undervalued. The book value of a company can be calculated from the company's balance sheet while the market value of a company is determined through its market capitalization, that is, the outstanding shares of the company multiplied by the current share price in the market.