It is more favourable to have a high or low book to market value

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Expert Solution

The companies Book Market ratio Must not be too high or too low but lower ratio is considered good.

Book to Market Ratio is a tool to measure the book value over the market value,

Vice Versa Market to Book Value is used to measure market value over book value.

Here, Book Value is The value or balance shown as per the accounts or Balance sheet (books) calculated by various accounting measures and the Market value is the Possible fair market value i.e.the amount for which something can be sold on a given market.

Book to Market Ratio = book value / market value

If the Book value = Market value then the ratio will be 1 and this is the ideal situation but there is always some difference between the book value and the market value some reasons being the efflux of time, market demands etc.

So, If the Book value is higher than market value the ratio will be more than 1 and vice versa in lower the ratio will be less than 1. A ratio greater than one indicates an undervalued company, while a ratio less than one means a company is overvalued.

It is better to have a lower book to market value i.e. between 0.33 to 1 or in any case it must not go below 0.2 because it may become too risky to invest in such condition.

vice versa speaking of market to book value between 1 to 3 is a safer condition.

ekkarill92 answered 1 year ago

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