Investment Formula Description
Market to book ratio is an investment formula to measure ratio of market capitalization to book value.
On the other words, market to book ratio is used to measure how much a corporation worths at present in comparison with amount of money invested by the investors into it. Sometimes, it is also known as price book ratio ( P/B ratio ) or price to book ratio. As its name, market to book ratio is actually comparing market capitalization with capital invested in this corporation. Hence, it is commonly used by value investors to look for company that are believed to be undervalued. When the companies have market value less than the book value or the market to book ratio is less than 1, it is believed that the companies were undervalued.Similar with price earnings ratio ( P/E ratio ), market to book ratio is the lower the better.
Market to book ratio = market capitalization / Book value
Investment Formula Example
If Corporation ABC has $ 5,000,000 market capitalization while the book value is $2,500,000 The market to book ratio calculation is as following.
Market to book ratio = market capitalization / Book value = 5,000,000 / 2,500,000 = 2
Corporation ABC has 2 for its market to book ratio. In this case, when corporation ABC went bankrupt immediately, the investors are only able to get back half of the total capital invested into corporation ABC.