Market-to-book and Price-to-earnings Ratios

One of the most frequent uses of financial state ment analysis is to value firms. One approach is to inspect the firm’s current equity market value in terms of its current equity book value, the marketto-book ratio; another approach is to view the firm’s current market value in terms of its current earnings, the price-to-earnings ratio. Thus the market-to-book ratio relates market value to the summary number in the balance sheet while the price-to-earnings ratio relates market value to the summary meausure in the income statement.