BIBLIOGRAPHIC INFORMATION

Article: The Popular Stock Metric That can Lead Investors Astray
Author: Rachel Layne
Website: Working Knowledge (Business Research for Business Leaders)
Date Published: December 06, 2021
SUMMARY INFORMATION
 Book-to-market ratio has become so detached from a modern economy driven by
research and intellectual property that it no longer accurate is signals so-called value
stocks. Its correlation with other valuation ratios fell from 75% to 45% hence institutional
investors still rely on an increasingly flawed measure for identifying value stocks
 Researchers compared companies book-to-market values with for alternative valuation
ratios they designed: sales-to-price, gross-profit-to-price, net payouts-to-price, and a
composite ratio. The researchers found that although these ratios all performed well in
predicting stock returns in the 1980s and 1990s, the book-to-market ratio no longer did
well between 2005 and 2017, while the alternative ratios continued to.
 Generally accepted accounting principles in the US treat such investments as expenses
that are deducted from income and do not consider them as assets on the balance sheet.
Such investments will therefore depress book equity value therefor WHEN YOU KNOW
THE ACCOUNTING, YOU CAN, AND YOU WILL, KNOW HOW TO MAKE ALL
THIS WORK.
REFLECTION AND ANALYSIS
Investors should consider alternative valuation ratios and not only focus on one because it
will not always be effective for all stock transactions or perform detailed intrinsic valuation
analyses. Consider a broad set of metrics that will be efficient for a particular transaction. It’s
not a good idea to stick to only one practice, be observant of the market place and always do
your research before investing. Go beyond ratios or do various analysis first. After reading
the article I cant help but wonder if I would be able to practice the advices given when I
,myself, embark into investing. The author clearly established her arguments and supported it
with sufficient evidences