Explain why growth shares have low book-to-market ratios while value shares have high book-to-market ratios

1 week ago

The "distinction between growth and value shares involves a distinction based on book-to-market value. Explain why growth shares have low book-to-market ratios while value shares have high book-to-market ratios.

Growth shares have low book-to-market ratios, while value shares have high book- to-market ratios. Firms coming off a low profit base but undertaking expansion through growth opportunities will have a relatively low book value as the firms will have a relatively low value of historical assets in place.

However, the market value will be higher as it incorporates some of the future value arising from the growth opportunities. Thus, the book-to-market ratio of growth shares is low.

In contrast, value shares are those with a relatively high value of assets in place. These firms are generally viewed by the market as having low growth opportunities; therefore, their market price is relatively low, being closer to book value. As a result, value shares have a high book-to-market ratio.

Bench Partner
Oct 9, 2021

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