Question

Greetings all

I’m developing a financial report regarding a specific company. The following part is something I wrote which my instructor said it is totally wrong with no further explanation. Please can anyone help me know did I do something wrong here when it comes to my interpretation.

1. MARKET-TO-BOOK RATIO VS YEAR

The market to book in 2015 was 1.02 (approximately 1) which means the company is almost accurately valued. However, in 2016, the value decreased to 0.88 which indicated that the company’s price is overvalued. The ratio increased again until it reached 1.16 in 2018. This ratio doesn’t include the intangible assets which can tremendously affect the valuation of the company.

Year	2015	2016	2017	2018
Market to Book Ratio	1.02	0.88	1.07	1.16

Regards

Answer 1

Market value is no.of common shares outstanding *Market price per share &

Book value is total assets-total outside outside liabilities(Both current + long-term). Ie. Net assets which is equal to total stockholders' equity in the balance sheet.Book value /share is above divided by no.of shares currently o/s.

Taken as total values or per share , MV/BV is the market-to book ratio.

It denotes the no.of times the book value , the market value is .

When the ratio is greater than 1, it means that the investors , overvalue the particular stock , as a result of many factors like regular dividend payments, management team & policies, social responsibility displayed by the management, etc.---by virtue of which they are willing to pay more ,for the stock, than its net assets value.

On the otherhand,when the ratio is less than 1, it means that the investors , undervalue the particular stock , again as a result of many factors like --may be irregular or no dividend payments, bad management team & their unfriendly policies, lack of social responsibility or under-performance ,etc.---because of which they are not willing to pay the book-worth of the stock.

That said,

The yearly ratios indicate :

in 2015 the market value is 1.02 times the book value, when it is said to be slightly over-valued in the market, or as you say almost near book value

in 2016, the market value is only 0.88 times the book value, when the stock is under-valued in the market. Investors are willing to pay only 0.88 as against the book value of $ 1

in 2017, the market value increased to 1.07 times the book value, when the stock is over-valued in the market. Investors are willing to pay more than the book value , ie. $ 1.07 for $ 1 BV

in 2018, the market value increased further to 1.16 times the book value, when the stock is over-valued in the market. Investors are willing to pay more than the book value , ie. $ 1.16 for $ 1 BV

If the BV consists of heavy amts. In intangible assets, it will certainly, bring down the MV/BV ratio,escalating the BV worth of the stock.

So, with your review, pl. note that only the foll. Observation about 2016 needs revision:

However, in 2016, the value decreased to 0.88 which indicated that the company’s price is overvalued.

here, the stock is undervalued by the market forces.