The comparison between the zero-growth Market-To-Book (MTB) and the MTB observed in the markets is a powerful analytical tool to understand the implied expectations of investors and the credibility of the company’s strategy.

Key lessons learned from this gap include:

1. The definition of the two indicators

To understand the comparison, we must first define the terms:

• Observed MTB (actual): This is the ratio of Enterprise Value to Book Capital Employed (EV/CE). It indicates how much the market is willing to pay for one euro of capital invested by the company.
• Zero-growth MTB (theoretical): This is the ratio of current performance to the cost of capital (ROCE after tax / WACC). It represents the theoretical valuation of the company if it maintained its current profitability (ROCE) indefinitely but without any growth (just a perpetual rent).

2. The “Credibility Gap”

The most critical lesson comes when the actual MTB is lower than the theoretical MTB.

• The observation: This means that the company has a high profitability (ROCE) today, but that the market refuses to pay for this level of performance. It anticipates that this profitability is not sustainable and will fall.
• The example of Carrefour:  Carrefour in 2020. The company had a ROCE of 15% for a WACC of 5-6%, which should have justified a theoretical MTB of 2.5 to 3. However, the real MTB stagnated around 1.
• The interpretation: The market doubts the sustainability of the turnaround or strategy. This gap is called a ” credibility gap “. It often takes several years (sometimes more than 4 years) of sustained performance to convince the market and close this gap.

3. The Growth Premium

Conversely, if the actual MTB is higher than the zero-growth MTB, it indicates that the market is valuing opportunities for future growth.

• The market believes that the current performance is not only sustainable, but that it will apply to a broader capital base in the future.
• This is often the case for fast-growing companies whose stock price incorporates a significant “terminal value” or growth options.

4. Predicting the erosion of performance (The Beiersdorf case)

The historical analysis of the Beiersdorf case (Nivea) illustrates how the market uses this gap to anticipate cycle reversals:

• Optimism phase (<2008): The market was anticipating earnings growth (observed MTB > theoretical MTB).
• Doubt phase (>2015): The market has stopped believing in the maintenance of the firm’s high performance (observed MTB < theoretical MTB).
• Validation (2022): Real performance (ROCE) ended up falling sharply (from 36% to 20%), retrospectively validating the pessimism of the market. The two curves then joined.

5. Calculating implied growth

Finally, mathematically, equalizing the theoretical formula of the MTB with the observed MTB allows analysts to extract the implied growth rate (g) that the market assigns to the company.

• If this implied g-rate is unrealistic (too high in relation to the sector), it signals an overvaluation (speculative bubble?).
• If it is too low (or even negative while the company is growing), it signals undervaluation or major mistrust.

In short, the comparison helps answer the question: “Is the market paying for future growth, or does it even doubt the sustainability of current profits?”