FINANCIAL
STATEMENT ANALYSIS 1-45
Market / Book Ratio
Amount investors
will pay relative
to value on books
The Market / Book Ratio shows how much investors are willing to pay
relative to the value of the company as shown on its books. The total
market value of a company is the value that investors in the stock market
(where the shares are being traded) think the company is worth. This
value is derived from the stock price at which the shares are trading. For
example, the market value for XYZ Corporation is $101.6 million (8
million shares times $12.70 per share).
To calculate the Market / Book Ratio, the analyst must first compute
the book value per share. This computation is the value of
C
OMMON
E
QUITY
divided by the
Number of Shares
.
Book value per share
=
(Common Equity) / (Number of shares)
=
($105.8) / (8.0 shares)
=
$13.225 per share
The Market / Book Ratio is calculated by dividing the market price per
share by the book value per share.
Market / Book = (Market price per share) / (Book value per share)
= ($12.70) / ($13.225)
= 0.96 times
The Market / Book Ratio indicates how many times above (or below) the
book value of the company investors are paying for an equity position. In
our XYZ Corporation example, investors are not quite willing to pay the
book value for the equity of the company. (1.00 times means that the
market price and the book price are the same.)
Using Ratios
The ratios we have just studied provide the analyst with information
about a company's liquidity, asset management, debt management, and
profitability. They also indicate how market investors value the
company's efforts. These ratios also provide additional insights when
compared to the ratios of other companies and when trends are
mapped over a period of time.