MBA Accounting

Investors and analysts will normally deploy one particular  market base accounting ratio which is the Market to Book ratio.

This ratio expresses the relationship between a company’s value in the stock market and the net asset value as per the company’s balance sheet.

The formula is = market price per share/book value per share.

The purpose of this ratio is to indicate the value investors place on the company. To a certain extent, this ratio can reflects that the company’s assets are undervalued.

Simple illustration:

In 2006, Company A’s market price per share =$2.20

The book value of its share was $2.00

It’s market/book ratio

=$2.20/$2.00 =1.10

which means that the company’s value in the market place is 10% higher than its actual book value.

So what might this ratio reveals:

• it might indicates that the company’s assets are understated/undervalued and

• its prospects are good and investors believe that its earnings and value would grow

The market/book ratio summarizes investors’ views on the company’s performance and its future prospects. This is done when the investors decide the rate(price) for a business and they mark the share price at a premium or discount depending on whether the return is more or less.

This entry was posted on Friday, November 2nd, 2007 at 4:14 am and is filed under d. Interpretation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.