By: Rebecca K McDowell | Reviewed by: Ashley Donohoe, MBA | Updated February 09, 2019
Valuing a business entity is a complicated matter and there are several different methods used to do it. However, if you are an investor looking to evaluate stock price, you can compare book value per share to market value per share to decide whether to buy shares or not.
The book value of the stock is the book value of the company divided by the number of shares outstanding; The market value of the stock is the current price of the stock on the open market.
What are common stocks?
shares in common shares are ownership shares in the issuing company. When you buy common stock, you buy a piece of the company. Common stock can be publicly traded or private. When people talk about owning or buying stocks, they usually mean common stocks. Shareholders who own common stock have the right to vote on the Company’s actions.
What are preferred stocks?
Some companies issue both joint and preferred stock. Preferred stock is a type of stock that gives the holder preferential status in paying dividends. Preferred stockholders receive dividends before common stockholders.
Preferred stocks are also less risky; However, Common stocks can have a higher yield. Preferred shareholders typically do not have voting rights in company decisions (although every company is different and some preferred shareholders allow limited voting rights).
Publicly Traded Stocks
Public companies are companies that can issue shares publicly traded on the stock exchange. Anyone with the money can generally buy the stock and earn an interest in the company. Publicly traded companies are required to file financial reports with the Securities & Exchange Commission, and these reports are available to the public so that potential investors and current shareholders can assess the company’s financial health.
Private or closely held companies
A private company or closely managed company, is an unlisted company. The shareholders of a private company are usually, though not always, company insiders, and private companies are usually small companies (although some larger companies have close affiliates). The public does not have access to these companies’ stocks and they are not required to file with the SEC, meaning their financial information is not publicly available.
What is book value?
book value per share based on the book value of the company. Book value is the value of the company based on its financial statements (books). The Company’s financial statements will reflect the value of its assets as well as its liabilities; When you subtract liabilities from assets, the number at the end is the book value of the business.
For example, if Company XYZ’s financial statements show assets of $10 million and liabilities of $8 million, the book value is $2 million, which is the difference between the two. If Company XYZ liquidates and pays off all of its debt, shareholders would then have $2 million in equity to split.
reliability of book value
The book value is based on the value of company assets as the company reports. These values may or may not come from a formal assessment; The values listed are not necessarily what someone would pay for the assets. As a result, book value is an accounting number that may or may not reflect the reality of the company’s operations.
What is market value?
That market value of a company, also called market capitalization, is the current price per share on the open market multiplied by the number of shares outstanding. If Company XYZ’s stock is trading at $25 per share on any given day and there are 100,000 shares outstanding, then Company XYZ’s market value is $2.5 million.
The market value reflects that perceived value of the company as a going concern and the public’s impression of how the company and its industry are doing. Some industries are more valuable than others. On December 31, 2018, tech giant Apple’s shares closed at $157.74 per share and remained stable, while streaming service Netflix ended the year at a whopping $267.66 per share and continued to climb in 2019.
Calculation of book value per share
To calculate book value per share:
- Subtract the company’s reported liabilities from the reported value of its assets to get the total book value. You can get this information from the company’s SEC filings, which are public if you buy publicly traded stock.
- Take the book value and divide it by the number of shares outstanding. Using the example above, where Company XYZ has 100,000 shares outstanding and a book value of $2 million, the book value per share is $20 (the value divided by the number of shares).
Calculation of market value per share
Market value per share is a simpler calculation as it is available to the public. Look at the stock market to see the stock price for that company that day and you have the market value per share. Company XYZ shares are trading at $100 per share and that is the market value per share.
Book value vs. market value
Book value and market value are not necessarily the same. Book value is based solely on the reported financial position of the companywhile the market value is mainly based on that of the company Cash Flow and Public Confidence in the company’s future, in the company’s industry and in the economy as a whole.
The two values can be the same, close together, or quite far apart. If a company’s book value is higher than its market value, it could mean that public interest or trust in the company or its industry might not be as high. If market value is higher than book value, the public can be confident that the company or industry will take off.
Invest by market and book value
You can compare book value and market value to make investment decisions. For example, a person looking at Company XYZ might see that it is The market value is higher than the book value. When Company XYZ has few tangible assets but makes or has a lot of money from those assets Potential to make lots of money in the future, its higher market value would make sense. The market as a whole is confident that Company XYZ will become or remain profitable.
If The book value is higher than the market valuemany investors will see it that way an opportunity to buy shares at a low price for a company that’s doing pretty well. Others may see it as proof that the company or its industry will no longer be relevant down the road.
Examples of book value and market value
Netflix filed its financial statements with the SEC for the third quarter, which reported assets of approximately $23.4 billion and liabilities of approximately $18.4 billion with book value of approximately $5 billion. With 436,084,995 shares outstanding at the end of the quarter, book value per share was only approximately $11.47. However, on September 28, 2018, two days before the end of the quarter, the market price per share was $374.13, or more than 32 times book value.
Apple, meanwhile, as of the end of the second quarter of 2018, reported assets of approximately $349 billion and liabilities of approximately $234 billion with an approximate book value of $115 billion. At the time, there were about 4.8 billion shares outstanding, making the book value per share about $23.96 per share. Apple stock closed June 29, 2018 at $185.11 per share.
So while the book value of Netflix was less than the half Apple’s market value was almost double Apple’s market value in this example (despite reporting from different quarters), showing how Book value does not always affect market value.