About Market to Book Ratio Calculator (Formula)
The Market-to-Book Ratio (M/B ratio), also known as the Price-to-Book Ratio (P/B ratio), is a financial metric used by investors and analysts to evaluate the relative valuation of a company’s stock compared to its book value. The M/B ratio helps investors determine whether a stock is overvalued or undervalued by considering the relationship between the market price per share and the book value per share. To calculate the Market-to-Book Ratio, you can use the following formula:
Market-to-Book Ratio (M/B Ratio) = Market Price per Share / Book Value per Share
Now, let’s break down each component of the formula:
- Market Price per Share: This is the current trading price of one share of the company’s stock on the stock exchange. It represents the price at which investors are buying and selling the stock in the open market.
- Book Value per Share: The book value per share is a measure of a company’s net asset value per outstanding share of common stock. It is calculated as:
Book Value per Share = (Total Shareholders’ Equity – Preferred Stock) / Number of Outstanding Common Shares
- Total Shareholders’ Equity: This is the total value of the company’s assets minus its liabilities. It represents the net worth of the company and is often found on the balance sheet.
- Preferred Stock: If the company has preferred stock outstanding, you should subtract its value from the total shareholders’ equity since preferred stockholders have a higher claim on the company’s assets than common stockholders.
- Number of Outstanding Common Shares: This is the total number of common shares of stock that the company has issued and are in the hands of investors.