TABLE OF CONTENTS The relationship between share prices (their market value for listed companies) and their book value is the subject of considerable study by financial analysts. In this chapter, we will analyze the relationship between the two parameters in several companies and different countries. We will also analyze the influence of the PER and the ROE on this relationship.
Figure 5.1 shows the evolution of the market-to-book ratio of the U.S. stock market and the S&P 500 in recent years. Obviously, both lines move in parallel: when stock prices rise, the shares' market-to-book ratio also rises and viceversa. However, it is important to remember that the equity book value increases when there are capital increases, when companies retain earnings and also when assets appreciate.
Figure 5.2 shows the evolution of the market-to-book ratio (E/Ebv) of Coca Cola and Pepsico. It is interesting to see that although Coca Cola's ratio has been markedly higher during the period 1991 2001, the two companies' ratios have been converging since mid-1998 and had almost met by 2001.
Figure 5.3 shows the evolution of the ratio of three of the world's largest companies: General Electric, Microsoft, and Cisco. Note the enormous market-to-book ratio of Cisco in the second...
