Market Value to Capital Ratio

Stock gurus develop personal stock evaluation models. Some methods rely heavily on corporate information, such as sales and earnings. Other techniques depend on technical stock data. Analysts compare and evaluate the numbers. Common correlations include the price to earnings relationship, or ratio, and the price to book ratio. Market value to capital ratio is another stock assessment tool.

The amount of money expected in the open market for a particular asset sold is its market value. A tangible asset -- an asset that is real and material, or physical -- can be as large and expensive as a business or a property, or as small as a share of stock or piece of jewelry. The current market value of a company can be calculated by multiplying the number of common stock shares outstanding by the current stock price.

Capital refers to the monetary value of a business. It is the value of a business minus liabilities, or the company’s debts. A stricter accounting definition of capital is the book value of the company’s assets less the book value of all liabilities. This is the company’s liquidation valuation.

Suppliers and investors want to know if a company has sufficient capital to meet its operating needs. The capital ratio answers this question. The ratio computation is capital divided by assets. Assets are assigned a risk-adjusted number. The risk-adjusted capital ratio is capital divided by risk-adjusted assets, calculated by multiplying the value of each asset by its risk weighting. The U.S. government debt has a "0" weighting; it is considered a riskless investment. Corporate debt and the debt of certain governments are assessed at 100 percent. The higher the number, the greater the risk.

Market value ratio compares a security’s current market price or average market price over a specified time period to any item on a company’s financial statement. Market value to capital ratio compares a firm’s market value to its capital. Ratios help analysts determine whether or not a security is fairly priced, undervalued or overvalued.

The MVIC ratio -- market value to net invested capital -- measures a company’s value. Net invested capital is capital invested in the company, minus money removed. The result -- market value/net invested capital -- indicates whether stock is reasonably priced, cheap or expensive. A benchmark comparison of 1.60 indicates the average MVIC for companies from 2002 through 2010. A number below 1.60 indicates the stock may be undervalued; over 1.60 means the stock could be overrated.