Book Value and Market Value

Today we are going to understand the difference in Book value and Market value. They are also referred as Book Values and Market Values. So let’s begin..

What is Book value and Market Value ?

Book value is the net value of a firm’s assets found on its balance sheet, and that is the amount which all shareholders of the company would get if the company is liquidated(to liquidate means to close the company). It is what investors would get if they sold all the company’s assets and paid all its debts and obligations.

Book value of a company = Total assets − Total liabilities

When we divide book value by the number of outstanding shares, we get the book value per share (BVPS). It allows us to make per-share comparisons. Outstanding shares consist of all the company’s stock currently held by all its shareholders.

On the other hand, Market value is also known as market cap and is calculated by multiplying a company’s outstanding shares by its current market price.

Market cap of a company = Current market price per share X Total number of outstanding shares      

Market Value Per share, it is simply the current market price of the share of the company.

 

Key Differences Between Book Values and Market Values –

Many investors and traders use both book and market values to make decisions. There are three different scenarios possible when comparing the books valuation to the market value of a company.

1. When market value of the company is greater than the book value of the company, it indicates that investors believe the company has excellent future prospects for growth, expansion, and increased profits. They may also think the company’s value is higher than what the current book valuation calculation shows. Usually you will find that most of the companies have market value higher than its book value because it market value realizes the potential future growth which its assets can bring.
2. When Book value of the company is more than its market value, it indicates 2 things mainly – i) Stock is not discovered by the market yet and has been undervalued and its potential is yet to be discovered or ii) Market has lost confidence in the stock as it has not performed well and market does not believe stock is worth trading at its Book Value.

Key metric to compare Market value and Book Value –

• The Price to Book Ratio (P/B Ratio) – This ratio is a good way to compare the Market Valuation of a company to its Book Values. Formula for calculating PB ratio is – Market Price per Share / Book Value Per Share

To know that if the stock’s PB ratio is high or low, it is good to compare it with the industry peers. If the stocks PB is higher than the industry average, it means that the price of the stock is over valued, and if it is lower than the industry average, it might be undervalued.

Remember, if the stock is overvalued, it doesn’t mean you shouldn’t buy it, it may also mean the company is performing well and the investors are ready to pay the price. Similarly, if the stock is undervalued, it doesn’t mean it is cheap, it may also mean that the company may not be performing well enough and investors don’t see value in it.

Here we come to the end of this learning, hope you found good, check out our other articles as well and expand your knowledge!

Join us on Telegram : https://t.me/joinchat/-UKqzx0Sy31lMWY1