Profit and Shareholder Wealth Comparison

Introduction The concept of market-to-book ratios can be defined by a study of two contrasting strategies applied to maximize profits. General Electric Corporation has pursued a conservative growth strategy by focusing on being the best in each industry where it competes. Tyco International has focused on an aggressive strategy through rapid, multiple acquisitions. Market-to-book ratios reveal if a stock is overvalued or undervalued. If the ratio is greater than one, then the stock is overvalued. …

…numbers from the income statements for each company reveal which strategy is paying dividends in the long run. A more in-depth study into market-to-book ratios might include looking at how the magnitude of each ratio has been changing over time. This might show drastic sweeps in TYCO's case due to the aggressive approach. In contrast, the magnitude of the ratio for GE might have changed very little over time, resulting in more predictable profit margins.