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Book-To-Market Ratio A ratio used to find the value of a company by comparing the book value of a firm to its market value. Book value is calculated by looking at the firm's historical cost, or accounting value. Market value is determined in the stock market through its market capitalization. Formula:
Basically, the book-to-market ratio attempts to identify undervalued or overvalued securities by taking the book value and dividing it by market value. In basic terms if the ratio is above 1 then the stock is undervalued, and if it is less than 1 then the stock is overvalued. This term can also be inversed to be the market-to-book ratio.
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