December 01, 2025
4 mins read
When you look at a company’s shares and try to figure out if they are worth the price, you usually turn to a few key financial ratios. One of those ratios is the Book-to-Market Ratio, also known as the inverse of the Price-to-Book (P/B) Ratio.
You will often hear investors talk about the P/B ratio when comparing what a company is worth on paper to what the market is willing to pay for it. But understanding the Book-to-Market Ratio gives you the same picture from the opposite angle — how much of a company’s actual value you are getting for the price you pay.
To fully comprehend this ratio, it can be thought of as comparing only two types of value:
Book Value - the logical worth of the actual components of the business after subtracting the liabilities from the total assets.
Market Value - the perceived worth from investors in the market based on the current share price of the business.
Here is a simple example.
Let's say a company has shares trading at ₹150 in the marketplace and a book value of ₹100 per share. Therefore, the Price-to-Book ratio (P/B Ratio) is 150 ÷ 100 = 1.5, which indicates that the market is willing to pay ₹1.50 for every ₹1 worth of net assets valued by the company. If you reverse this calculation, the Book-to-Market ratio would be 100 ÷ 150 = 0.67.
In this instance, the company's shares are trading at a premium over the book value. All the Book-to-Market ratio indicates is how the market is valuing the company differently than GAAP accounting worth.
To facilitate comparisons, market and book two values are frequently stated in a per share basis:
Market value per share = Total market value ÷ Total shares
Book value per share = Total book value divided by Total shares.
When showing these two market value and book value amounts, you can understand how price is comparable and valued versus the company's ownership.
The Book-to-Market Ratio gives you a practical way to compare a company’s real value with what investors are paying for it in the market.
Here’s how it works. The book value is what remains after subtracting all liabilities from a company’s assets. The market value is calculated by multiplying the company’s stock price by the total number of shares outstanding.
By dividing one by the other, you can have a sense of whether the company is valued higher or lower than its carrying value, or book value.
If the market value is significantly greater than the book value, investors may be betting on strong growth in the future. If the market value is less than the book value, the market may not be too excited about the company’s future earnings.
It is not a formula that tells you what will happen next, but it shows you how the market currently perceives the business.
The Book-to-Market Ratio can be determined by applying a simple formula:
Book-to-Market Ratio = Common Shareholders’ Equity ÷ Market Capitalisation
Once you calculate the ratio, here are some possible implications:
The company may be trading below the anticipated value of its common equity on the balance sheet. This may happen if the market has low expectations for a company or if a company’s industry is going through a period of cyclically low expectations. It may also attract investors who are looking for good deals on low-priced stocks.
The company may be trading above book value. This is common when investors expect the company to grow faster in the future. This usually occurs for companies in the technology or digital services industries, where there are few physical assets, but the value of growth potential may be high.
The Book-to-Market Ratio gives you a sense of how to balance your perspective on what a company owns with how much the market thinks it is worth. Therefore, it is most useful when you can consider a Book-to-Market Ratio alongside those of other companies in the same industry.
Additional Read: What is Book Value Per Share (BVPS)?
Both ratios describe the same relationship between a company’s market value and its book value, only viewed from opposite directions. The Market-to-Book (P/B) Ratio shows how much investors are paying for each unit of book value, while the Book-to-Market ratio simply inverts this. Together, they help you evaluate whether a stock appears overvalued or undervalued relative to its net assets.
Aspect | Market-to-Book (P/B) Ratio | Book-to-Market Ratio |
Definition | Indicates how much an investor is willing to pay for each rupee of book value. | Reflects how much of the company’s book value you get for each rupee of market value. |
Formula | Market Value ÷ Book Value | Book Value ÷ Market Value |
Interpretation (Value > 1) | The company’s market value exceeds its book value — investors are paying a premium. | The company’s book value exceeds its market value — the stock may trade below its asset value. |
Interpretation (Value < 1) | The market value is below the book value — the stock may be undervalued. | The market value is above the book value — investors may be paying more than its recorded assets. |
Perspective | Focuses on how the market values the company’s assets. | Focuses on how the company’s assets relate to its market value. |
Purpose | Used to gauge investor sentiment and market valuation. | Used to identify potential value opportunities relative to book value. |
Both ratios provide factual insight into valuation; they do not suggest investment decisions but serve as analytical tools for your assessment.
If you enjoy analysing companies based on their value, the Book-to-Market Ratio is a simple method to assess whether a stock is trading at a fair price. It helps you to estimate whether the market is under/overvaluing a company compared to its economic value.
Keep in mind that the values differ from industry to industry. A low ratio from one industry may be typical from another. The most useful way to analyse it would be to benchmark other companies in that industry.
Also, the ratio does not tell the whole story. You may want to look at other measures such as earnings growth, level of debt to earnings, or cash-flow to fully analyse a company.
By utilising the Book-to-Market Ratio in conjunction with other financial metrics, you can feel more confident about the position of the company both in terms of book price and market value.
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A high Book-to-Market ratio suggests the company’s stock might be undervalued. It means the market price is low compared to the actual book value, often attracting value investors seeking potential opportunities.
Investors use this ratio to compare a company’s actual worth (book value) to its market price. It helps them judge whether a stock is priced fairly, undervalued, or overpriced based on its underlying assets.
It’s useful for value investors, analysts, and fund managers. It helps them identify undervalued companies, compare stocks within the same industry, and make more informed decisions about potential investments.
They’re opposites. Book-to-Market is book value divided by market value, while Price-to-Book is market value divided by book value. Both show valuation insights but from different angles, helping investors analyse stocks more effectively.
Not always. It’s less effective for industries with primarily intangible assets, such as tech or service companies. For asset-heavy industries, it works better. So, comparisons should be made within the same industry for accuracy.
It helps investors identify whether a stock is trading below its actual worth, which may signal a good buying opportunity. It’s a key metric in value investing and comparing companies in the same sector.
It ignores future growth potential and doesn’t account for intangible assets. It may also mislead in industries with fewer physical assets. That’s why it’s best used in conjunction with other financial indicators to provide a more comprehensive picture.
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