The price-to-book ratio measures a firm’s market value relative to its book value, while the book-to-market ratio measures a firm’s book value relative to its market value.
Thus, the book-to-market ratio is the inverse of the price-to-book ratio.
Value investors would therefore be looking to invest in companies with a low price-to-book ratio or, conversely, a high book-to-market ratio.
While it might appear that these two ratios are interchangeable, some investors prefer the book-to-market ratio.
Why?
If you search for companies with the highest book-to-market ratio, the most undervalued companies will be at the top of the list.
But if you search for companies with the lowest price-to-book ratio, the top companies in your list will be ones that have a negative book value (because they have a negative price-to-book ratio). These aren’t the types of companies that a value investor is seeking to invest in.
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