Understanding Market Value
Market value, on the other hand, is the market capitalization of the company. It is the value at which its shares are being traded in the market. The formula for calculating the market value is as follows –
Market Value = Market Price Per Share X Total Number of Shares Being Traded in the Market
So, in the above example, if the market value of each share is Rs. 15, the market value of the company would be Rs. 15 * 3 crores = Rs. 45 crores
Importance of Book Value and Market Value for Investments
Both book value and market value can help you ascertain the value of a company. However, each of these values has its respective relevance to investment decisions. Here’s how –
Book Value and Investments
The book value gives you a fair idea of what the company is worth in financial terms. It shows the amount that you stand to get in case of a company’s liquidation.
If the book value of a company is higher than its market value, it means that its stock price is undervalued. This is a basic tenet of value investing. Since the stock is undervalued, you can buy a larger volume. So when the company’s value increases, you can stand to make considerable gains.
So, when investing, consider the book value. Choose stocks whose book value is higher or closer to their market values.
That being said, book value works best for companies that have considerable fixed assets and investments at their disposal. For companies engaged in the IT sector, most of the assets are in intangible form. Since book value excludes the value of intangible assets, the value of the company may not be correct.
Market Value and Investments
Market value helps you make investment decisions based on how the stock is trading. If the market value of a company is high, it shows increased investor confidence. Investing in such stock can give you good returns.
On the other hand, if the market value is higher than the book value, it shows that the company is overvalued. One correction, and you might make a loss.
Also, Read – Important Ratios in Stock Market
Difference Between Book Value and Market Value
Here is a comparative table showing the differences between the book value and the market value of a company –
Book Value | Market Value |
| The book value is calculated using absolute figures in the balance sheet of the company. | The market value is calculated based on the current market value of the company’s shares. |
| The book value does not change constantly. | The market price per share depends on a lot of variables like market sentiments, demand and supply, socioeconomic conditions, etc. It keeps on changing constantly, thereby changing the market value too. |
| The book value denotes the shareholders’ part of the company’s assets. | The market value denotes the price traders are willing to pay for the stock. |
| Book value can be calculated from the financial reports of the company that are issued quarterly and annually. | The market value can be calculated anytime that you want to. |
| Book value is based on the balance sheet of the company. Therefore, the value could be outdated. | The market value is always up-to-date. |
Takeaway
It is always prudent for investors to factor in market and book values together. A single value alone usually doesn’t give the right picture. Choose stocks whose book values and market values are in tandem with each other.
FAQs
Key Takeaways. A company's book value is the amount of money shareholders would receive if assets were liquidated and liabilities paid off. Market value is the value of a company according to the markets based on the current stock price and the number of outstanding shares.
What is the difference between book value and market value of shares? ›
Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. Market value is the company's worth based on the total value of its outstanding shares in the market, which is its market capitalization.
What is the difference between book value and market value which is more important to the financial manager why? ›
The book value is more important to a finance manager:
The book value shows how much the shareholders would receive if the company was to be liquidated(their worth). If the market value is less than the book value it means that the reputation of the company to investors is bad and the opposite is true.
Which is more important in decision making, book value or market value? ›
For decision making purposes, for a more accurate assessment of the current values of assets, the market value should be preferred.
What is the importance of book value per share? ›
The book value per share (BVPS) metric can be used by investors to gauge whether a stock price is undervalued by comparing it to the firm's market value per share. If a company's BVPS is higher than its market value per share—its current stock price—then the stock is considered undervalued.
What is the difference between a common stock's market value and its book value quizlet? ›
Book value for a share of common stock is determined as the firm's owners' equity (from the balance sheet) divided by the number of common shares owned by all shareholders. Book value is used as a comparison indicator because the market value for successful companies is usually greater than its book value.
What is market vs book value ratio? ›
The book-to-market ratio identifies undervalued or overvalued securities by taking the book value and dividing it by the market value. The ratio determines the market value of a company relative to its actual worth.
What is the difference between book value and market value and how does it affect financial ratio analysis? ›
Book value and market value are two ways to value a company. Book value is based on a company's balance sheet while market value is based on a company's share price, which changes often due to stock market sentiment. Book value represents the financial strength of a company based on its assets, an objective number.
What is the difference between the book value and market value how will it affect WACC? ›
Market value is the price at which an asset would trade in a competitive auction setting. Book value refers to the value of an asset according to the account balance present on the balance sheet of a company.
What is the difference between book value and shareholders equity? ›
Book value is the recorded value of a company's assets, whereas shareholders' equity is the value of the assets minus liabilities.
Traditionally, any value under 1.0 is considered desirable for value investors, indicating an undervalued stock may have been identified.
What is the most important factor in valuation? ›
Purpose: The Most Important Business Valuation Factor
In the factors that lead to a valuation of the company's worth, the purpose of the valuation is the most important. That's because the purpose of the valuation establishes the premise of value.
Should you use book value or market value when calculating enterprise value? ›
Enterprise value is both the value of a business and the sum of the values of all claims on that business. Therefore, all financing claims must be valued at market (or fair) value instead of using book values from the financial statements. This applies to both debt and equity type claims.
Why is book value higher than market value? ›
When the market value is less than the book value, the market doesn't believe the company is worth the value on its books. A higher market value than book value means the market is assigning a high value to the company due to expected earnings increases.
What are the disadvantages of book value per share? ›
One of the limitations of book value per share as a valuation method is that it is based on the book value, and it excludes other material factors that can affect the price of a company's share. For example, intangible factors affect the value of a company's shares and are left out when calculating the BVPS.
What is the difference between book value per share and market value per share? ›
The book value denotes the shareholders' part of the company's assets. The market value denotes the price traders are willing to pay for the stock. Book value can be calculated from the financial reports of the company that are issued quarterly and annually. The market value can be calculated anytime that you want to.
Is closing stock valued at book value or market value? ›
Closing stock is always known to be valued at cost price or market price whichever term is less. This revolves around the principle of conservatism. As per this, all losses that are anticipated are required to be recorded in the books of accounts.
What is the difference between book value and face value of shares? ›
Book value: Recorded asset worth; Face value: Stated security value; Market value: Present market price. Beginners in the financial markets may often be so focused on learning complicated jargon that they overlook the significance of fundamentals.
What is the price to book value in the share market? ›
How the Price-to-Book (P/B) Ratio Works. Price-to-book value (P/B) is the ratio of the market value of a company's shares (share price) over its book value of equity. The book value of equity, in turn, is the value of a company's assets expressed on the balance sheet.
