The book value of a company is the financial reporting value of its net asset the difference between its total assets and most of its liabilities. If a company possesses total assets and liabilities of $200 million and $80 million, its book value is $120 million. On the other hand, market value is the sum of issued stock multiplied by the current market price for a stock share. It means that the market value represents all the expectations of a company’s future by investors. Apple had a disclosed book value of $90 billion in 2023, and its market value was unofficially claimed to be around $3 trillion, which shows that the market believes in its future profitability.
Book Value
Book value represents the net assets of a company after subtracting its liabilities, and it directly reflects the asset value on the company’s financial statements. The formula for calculating book value is:
Book Value = Total Assets – Total Liabilities
Mostly, the company doesn’t hide this figure and simply admits it in its financial reports. Book value is how much assets the shareholders of a company would get theoretically if this business goes under or even after bankruptcy.
A company with $1.5 billion in total assets and $500 million in liabilities would have a book value of $1 billion. Bank of America, for example, had a book value per share in 2022 of $30.41, indicating that the book value reflects the company’s underlying assets, not necessarily its market price.
The limitation of book value, as we said before, is that it only reflects historical costs and does not account for increased asset values or intangible assets like brand value or patents. As such, book values are not strong guides for what will happen in high-tech or asset-light companies.
Market Value
Market value is determined by multiplying the company’s stock price by the total number of shares issued, representing investors’ expectations of the company’s future prospects, risks, and returns. The formula for calculating market value is:
Market Value = Stock Price × Total Shares Outstanding
It covers the full evaluation of a company’s growth prospects. Apple was trading nearly 33 times its book value, meaning investors fully expected continued high growth and very strong profit margins from Apple in the future. In fact, by 2023, it was trading at a $2 trillion market cap.
Market value reflects several inputs, e.g., company performance, industry prospects, macroeconomic events, and investor sentiment. For instance, Tesla had a book value in 2022 of $11.2 billion, and its market value was worth around $835 billion, with its price-to-book ratio (P/B Ratio) exceeding 74.
Market value can move significantly in times of heightened or fearful market sentiment. In early 2020, at the start of the COVID-19 fallout, you will remember that book values did not collapse to zero as some stock market valuations followed suit! This lack of 1:1 tracking between cash and stock means market value is a key reflection of investor expectations, both in the short and long term.
Difference Analysis
The gap between book value and market value often reveals the discrepancy in a company’s market pricing and investor expectations. A company with a book value of $500 million and a market value of $1.5 billion implies market optimism about its future development. This gap is typically measured by the price-to-book ratio:
Price-to-Book Ratio (P/B Ratio) = Market Value / Book Value
The S&P 500 index currently trades at an average price-to-book ratio of 4.5 (as of the end of June 2023). A significant difference in price-to-book ratios is apparent when separated by industry. In the technology sector, this includes Google, with a price-to-book ratio of around 6.8, and Microsoft at about 10.4. By comparison, newer industries like tech sit higher, with companies in the sector fetching price-to-book ratios well over 10. Energy stocks have far lower measures than ExxonMobil has a P/B ratio of just 2.5. This indicates that investors anticipate greater growth in tech than in traditional industries.
It may also reflect whether a company’s assets are being overvalued or undervalued. In volatile market periods (like the recent heavy correction in 2022), some companies’ market values were worth less than their book values — and that provided an investment edge. An example is the group of value investors who noticed this: In 2022, Zillow’s price-to-book ratio fell to 0.9, which meant that market pricing was substantially below book value, making it a frequent appearance in FCF screens on multiple metrics (percentage acquisitions growth).
Application Scenarios
In terms of a value investment strategy, the book value is very important, particularly for asset-heavy sectors such as finance, manufacturing, and real estate. Value investors are drawn toward stocks for which the market price is less than the book value because they believe the assets are worth more than the market prices them. Book value is a fundamental test that Warren Buffett’s Berkshire Hathaway has used time and again to determine whether the stock of any given company is over- or under-valued.
Market value, on the other hand, is used more for growth stock analysis. These are priced at a premium where the price-to-book ratio is concerned, but investors pay this because they believe in the company’s future profitability. Tesla and Amazon, for example, could come in well under book value in their infancy, but they were priced with expectations of future growth. They often traded with price-to-book ratios over 10 and, in some years, even above 50. In 2019, Amazon had a price-to-book ratio of 74.
In scenarios like mergers or liquidations, book value is often used to estimate the internal worth of a company. During acquisitions, private equity funds often scrutinize the book value of a target company to ensure its assets are not overvalued. However, in speculative stock market environments characterized by panic and uncertainty, only one thing holds significance: market value. This emphasis on market value in such situations should make investors more alert and cautious in their decision-making.
