The ratio of an entity’s book equity to its market equity. In other words, it relates the original value of equity (on its books) to the value assigned to it by the market (market value of equity). This ratio reflects the so-called book-to-market effect (or value effect): high book-to-market equity often earns substantially higher excess returns (and hence is called value stock high BTM stock), while low book-to-market equity usually earns substantially lower returns (therefore it referred to as growth stock or low BTM stock). A high ratio is typically seen as a value stock where the market values equity cheaply vis-à-vis book value.
This ratio helps a business predict return on equity (ROE). Its inverse is known as price to book (P/B ratio).
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