The market-to-book ratio is a vital sign of a utility’s health.
James M. Seibert is the managing partner of Chicago Energy Associates LLC. Email him at firstname.lastname@example.org.
Shareholders and directors of electric and gas utilities need a consistent, credible, and intuitively clear way to evaluate how management is marshalling the company’s resources and to gauge management’s contribution to overall results. They need a single performance measure to summarize—as well as any one measure can—how the utility is performing both in absolute and relative terms and what the owners and stakeholders should expect in the future. Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first vital signs they monitor and as an ongoing and leading measure of a utility’s strategic health.
The market-to-book ratio is the ratio of the market value of all of the firm’s capital (both debt and equity) divided by the book value of the firm’s capital. The market value is determined by valuations made by the public capital markets (common and preferred share prices, debt prices, etc.); the book value is determined by the utility’s accrual accounting value stated in the periodic financial statements.