Book Value vs. Market ValueComparison and Differences between them

Written By:
Lisa Borga

Reviewed By:
FundsNet Staff

Book value and market value are both important measures of the value of a company, and it is easy to confuse these vital metrics.

However, they are very different concepts that can both offer important insights into what a firm is really worth.

So, why not take the time to learn what makes these two measurements different?

An Overview of Book Value vs. Market Value

Book value, which is the net asset value of a firm, is more difficult to compute than market value.

But, it is well worth it because it is useful for helping to choose valuable stocks to purchase along with helping to understand how your current stocks are performing.

The market value of a stock is the price at which people are willing to purchase the stock and is also a good number to keep an eye on since when compared with book value per share, it can give you some important information about a company.

Book Value

A company’s book value means its value as it is recorded in its accounts on its financial statements.

The book value of a company shows what investors should get if the company is liquidated.

It is the difference between the company’s total assets and its total liabilities.

The formula for book value is:

Book Value = Total Assets – Total Liabilities.

If SAMPLE Company had assets totaling $250 million and liabilities that totaled $110 million, the company’s book value would be $140 million.

$140,000,000 = $250,000,000 – $1,100,000

Total assets include many different types of assets.

There are physical assets that include things such as property, equipment, office supplies, and inventory.

Intangible assets are also part of total assets, and these include intellectual properties,  goodwill, and brand names, among others.

Total assets also include accounts receivable, cash, and short-term investments.

Whereas total liabilities consist of accounts, such as accounts payable, deferred taxes, and mortgages.

Examples of Book Value

Book value is not that hard to compute once you understand where to find the numbers.

Total assets and total liabilities are recorded on the balance sheet, and these are the numbers you will need to calculate the book value of a company.

Book value is also recorded on the balance sheet as shareholders’ equity.

If an investor wants to locate a company’s financial information, they can find it in quarterly or annual reports on the investor relations page.

An investor could check the balance sheet of Apple Inc.

(AAPL) for the 2020 fiscal year and find that it had assets of $351,002,000, total liabilities of $287,912,000, and total equity of $ 63,090,000.

This means their book value is $63,090,000 ($351,002,000 – $287,912,000), which is also the total equity.

However, the value will be lower if the company has a minority interest.

A minority interest exists when a company or investor owns less than 50% of a subsidiary, and it is not the parent company.

If a company has a lot of inventory, equipment, machinery, and real estate, then it will likely have a large book value.

Whereas software companies, consultants, and other organizations that deal in intangible products or services tend to have very small book values.

This is due to the fact that they primarily depend upon human capital, which is the economic value attached to the skills of an employee.

Book Value Per Share (BVPS)

Book value per share is a good ratio for making per share comparisons.

This ratio is calculated by dividing the book value by the number of outstanding shares.

The outstanding shares are all the shares of a company’s stock that its shareholders own.

Outstanding stocks also consist of sharing blocks that institutional investors own as well as restricted shares.

Limitations of Book Value

Book value does have some limitations on its usefulness.

One of these limitations is that this figure is only reported by companies quarterly or annually.

This means that an investor will only find out about any change in the book value after it is reported, which will be months apart.

Since book value is an accounting concept, it is sometimes adjusted.

When it is adjusted through processes like depreciation, it can be challenging to understand.

For instance, when a business has depreciated an asset over time, an investor might need to see several financial statements to understand how it affected the asset.

Also, the rules that apply to depreciation and other accounting concepts can be an issue.

For example, if a company consistently uses straight-line depreciation, it could end up having to report too high of a value for part of its equipment.

Sometimes book value fails to take into account the total impact of any claims on the company’s assets as well as the costs of selling them.

Should a company be a possible candidate for bankruptcy and have liens against its assets, its book valuation might be unduly high.

Additionally, if creditors are selling assets in a market at very low prices due to a depressed market, the assets will likely not be selling at full price.

Another problem with book value is the increase in the importance of intangible assets over time and how difficult it is to assign values to them.

Over time assets such as intellectual property have become an important part of many companies’ profitability due to advances in technology.

This leaves accountants to find a way to value these intangible assets to ensure that book value remains current.

Market Value

The market value of a company is the value placed on it by the stock market.

For assets, the market value is the price it could be sold for.

For companies, market value is very similar to market capitalization, although not entirely the same.

Market capitalization is the market value of the company’s equity.

Whereas market value takes into account a number of factors in addition to equity, such as long-term growth prospects and corporate debt.

Market capitalization is also known as the market cap of a company.

This is the total value of all of the company’s shares of stock and is calculated by determining the total number of shares and multiplying this by the price of the stock.

If SAMPLE company has a stock price of $50 and 50,000 shares of stock outstanding, the market cap is $2,500,0000.

The formula is:

Market Cap = Total Shares of Stock Outstanding * Current Market Price Per Share

$2,500,000 = $50 * 50,000

The market cap of a company does not stay the same even during the day since the value will change throughout the day as the price of the company’s stock changes.

However, the number of outstanding shares is likely to stay the same.

Additionally, the market value of the business could be higher than the market cap due to many things, such as the industry the company is in or some unique aspect of the company.

The market value can be quite different than the book value and has its limits.

Market value reflects the market’s view of a company, but this view may not always be correct, thus resulting in some stocks being overbought or oversold in the short term.

Those investors interested in the long term need to be wary of sudden significant increases or declines in a stock’s price.

It’s always better to consider more than just the market value or market cap of a stock.

Primary Differences Between Book Value and Market Value

It’s clear that the book value and market value of a stock are very different.

It’s generally good to look at both of these values when evaluating a stock.

There are three essential things to look at when comparing these values.

Market Value Higher Than Book Value

The market value of a company will generally be greater than its book value.

This happens because investors realize that companies have earnings power beyond their assets.

It also shows that the market believes the company will grow in the future and have higher earnings.

The higher market value may also be a result of investors believing that the current value of the company is higher than its book value indicates.

Book Value Higher Than Market Value

Although it’s unusual, the book value of a stock is sometimes higher than its market value.

This generally occurs when the market has lost confidence in the company.

This loss of confidence could be due to business problems the company is having or other issues that are causing difficulties for the company.

Whatever the case, it shows that the market believes the company is worth less than its book value indicates.

Some investors will seek out companies with a book value higher than their market value hoping that they are buying a stock that is worth more than they are paying for it.

But, it is essential to remember that this is not always the case, and the stock may not be worth more than its price.

Book Value the Same As Market Value

When the market value of a stock is equal to the book value, this indicates that the market believes the book value is an accurate assessment of the company’s true value.

It shows that the market thinks the company’s overall worth is the same as the value of its assets.

Price-to-Book Ratio

The price-to-book ratio is a common way to compare a company’s book value to market value.

It is calculated by dividing the market price per share by the book value per share.

An example of this is Alphabet Inc., with a market price per share of $2,980.62 and a book value per share of $342.74.

Its price-to-book value is 8.70.

This price-to-book value ratio shows that Alphabet INC. has a far greater market value than book value.

Uses of Book Value and Market Value

Companies generally raise capital through a combination of equity and debt.

When a company takes out a loan from a bank or financial institution, the bank or financial institution is going to be interested in book value.

The bank or financial institution wants to make sure they get repaid, so they want to know the value of the company’s assets which can be used as collateral.

Investors are likely to be interested in a combination of book value and market value, so they can see if a stock’s price is fair.

An investor can compare the book value to the market value to see if a stock is undervalued or overvalued.

This will help them to make better investment choices.

Key Takeaways

Book value is the net value of a company’s assets as they are listed on the business’s balance sheet.

Theoretically, this is the amount that stockholders would receive after a firm’s assets were sold and all debts were paid.

Book value can be used by a stockholder to determine the net value of the stock they have purchased.

The market value of a company is the value of its outstanding shares in the market along with other factors, such as profitability and debt load.

The term is often used interchangeably with market capitalization, although they have different meanings.

However, both of these calculations are made based on corporate assets.

The market value of a company is typically higher than its book value because investors place a value on the company’s expected growth and earnings.

Final Thoughts

Book value and market value can help individuals to understand a company’s actual value.

However, it is only by comparing the two that investors can see the full picture.

Just as with all financial measurements, investors must understand when and how to use market value, book value, or any of countless other financial tools to see how a company measures up.

FAQs

How is book value calculated?

Book value is calculated by subtracting total liabilities from total assets.

These figures can be found on a company’s balance sheet both quarterly and annually.

What is the price-to-book value ratio?

The price-to-book value ratio can be used by an investor to evaluate the value of a stock.

The price-to-book value ratio of a stock can be obtained by dividing the market price of the stock by the book value per share.

A lower price-to-book value ratio indicates a safer investment.

Is a stock with a higher book value a better investment?

A stock with a higher book value is generally considered better.

This is true because should the company fail, the investor can recover more of their investment.

However, it is best to consider the company as a whole.

It’s possible that a company that can afford to pay out higher dividends could have a higher price and yet still have a lower book value per share.

Therefore, it could be a good investment even with a lower book value.