how to use the book to market ratio
the book to market ratio identifies undervalued or overvalued securities by taking the book value and dividing it by the market value the ratio determines the market value of a company relative to its actual worth investors and analysts use this comparison ratio to differentiate between the true value of a publicly traded company and investor speculation in basic terms if the ratio is above 1 then the stock is undervalued if it is less than 1 then the stock is considered overvalued a ratio above 1 indicates that the stock price of a company is trading for less than the worth of its assets a high ratio is preferred by value managers who interpret it to mean that the company is a value stock that is it is trading cheaply in the market compared with its book value a book to market ratio below 1 implies that investors are willing to pay more for a company than its net assets are worth this could indicate that the company has healthy future profit projections and investors are willing to pay a premium for that possibility technology companies and other companies in industries that do not have a lot of physical assets tend to have a low book to market ratio difference between the book to market ratio and the market to book ratiothe market to book ratio also called the price to book ratio is the reverse of the book to market ratio like the book to market ratio it seeks to evaluate whether a company s stock is overvalued or undervalued by comparing the market price of all outstanding shares with the net assets of the company a market to book ratio above 1 means that the company s stock is overvalued a ratio below 1 indicates that it may be undervalued the reverse is the case for the book to market ratio analysts can use either ratio to run a comparison on the book and market value of a firm 