Valuing a corporate entity is complicated business, and there are multiple different methods used for doing so. If you're an investor looking to evaluate the price of stock, however, you can compare book value per share to market value per share to decide whether or not to buy shares.
The book value of stock is the book value of the company divided by the number of outstanding shares; the market value of stock is the current price of stock on the open market.
What Is Common Stock?
Shares in common stock are ownership interests in the company issuing them. If you buy shares of common stock, you're buying a piece of the company. Common stock can be publicly traded or private. When people talk about owning or buying shares of stock, they typically mean common stock. Shareholders who own common stock have the right to vote on the actions the company takes.
What Is Preferred Stock?
Some companies issue both common and preferred stock. Preferred stock is a type of stock that gives the holder preferred status when it comes to the payment of dividends. Holders of shares of preferred stock are paid dividends before holders of common stock.
Preferred stock is also less risky; however, common stock may have a greater rate of return. Preferred stockholders usually do not have the right to vote on corporate decisions (although every company is different, and some may permit limited voting by preferred shareholders).
Publicly Traded Stock
Public companies are companies that issue stock that can be publicly traded on the stock market. Anyone with the money, generally, can buy the stock and gain an ownership interest in the company. Publicly traded companies have to submit financial reports to the Securities & Exchange Commission, and those reports are available to the public so potential investors and current shareholders can assess the business's financial health.
Private or Closely Held Companies
A private company, or closely held company, is a company that isn't publicly traded. The shareholders of a private company are typically company insiders, although not always, and private companies are usually small businesses (although some larger companies have closely-held subsidiaries). The public doesn't have access to shares of these companies, and they don't have to report to the SEC, which means their financial information isn't publicly available.
What Is Book Value?
Book value per share is based upon the book value of the business. Book value is the company's value based upon its financial statements (its 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 figure at the end is the company's book value.
For example, if XYZ Company's financial statements show assets worth $10 million and liabilities of $8 million, the book value is $2 million, which is the difference between the two. If XYZ Company liquidates and pays off all its debts, shareholders would have $2 million in equity to divvy up afterwards.
Reliability of Book Value
Book value is based upon the value of the company's assets as reported by the company. These values might come from a formal appraisal, or they might not; 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 business.
What Is Market Value?
The market value of a company, also known as market capitalization, is the current price per share on the open market multiplied by the number of outstanding shares. If XYZ Company's shares are trading at $25 per share on a given day and there are 100,000 outstanding shares, then the market value of XYZ Company is $2.5 million.
Market value reflects the 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, shares in tech giant Apple closed at $157.74 per share and has remained steady, while streaming service Netflix closed the year at a whopping $267.66 per share and continued to climb in 2019.
Calculating Book Value Per Share
To calculate book value per share:
- Subtract the company's reported liabilities from the reported value of its assets to obtain the overall book value. You can get this information from the company's SEC filings, which are public if you're buying publicly traded stock.
- Take the book value and divide it by the number of outstanding shares. Using the example above where XYZ Company has 100,000 outstanding shares and a book value of $2 million, the book value per share is $20 (the value divided by the number of shares).
Calculating Market Value Per Share
Market value per share is an easier calculation, because it's available to the public. Look at the stock market to see the price of shares for that company on that day, and you'll have the market value per share. XYZ Company's shares are trading at $100 per share, and so that's the market value per share.
Book Value vs. Market Value
Book value and market value won't necessarily be the same thing. Book value is based solely upon the company's reported financial condition, while market value is primarily based upon the company's cash flow and the public's confidence in how the company will do in the future, in the company's industry and in the economy as a whole.
The two values can be the same, close to the same or quite far apart. If the book value of a company is more than the market value, it could mean that public interest or confidence in the company or its industry might not be as high. If the market value is higher than the book value, the public may expect the company or industry to take off.
Investing Based on Market and Book Value
You can compare book value and market value to make investment decisions. A person looking at XYZ Company, for instance, might note that its market value is higher than its book value. If XYZ Company has little in the way of tangible assets but makes a lot of money off of those assets, or has potential to make a lot of money in the future, its higher market value would make sense. The market on the whole has confidence that XYZ Company will become or remain profitable.
If book value is more than market value, many investors will see it as an opportunity to buy stock at a low price for a company that does fairly well. Others may see it as evidence that the company or its industry are not going to be relevant later.
Book Value and Market Value Examples
Netflix filed its third quarter financial statements with the SEC showing assets of about $23.4 billion and liabilities of about $18.4 billion for a book value of about $5 billion. With 436,084,995 outstanding shares at the end of that quarter, the book value per share was only about $11.47. However, on September 28, 2018, two days prior to the end of the quarter, the market price per share was $374.13, or more than 32 times book value.
Apple, meanwhile, reported about $349 billion in assets at the end of the second quarter in 2018 and about $234 billion in liabilities for a rough book value of $115 billion. About 4.8 billion shares were outstanding at the time, so the book value per share was about $23.96 per share. Apple stock closed on June 29, 2018 at $185.11 per share.
So while Netflix's book value was less than half of Apple's, its market value was nearly twice Apple's market value in this example (although the reporting is from different quarters), showing how book value doesn't always influence market value.
- Books & Co. | PBS
- Market Beat: Book Value Per Share – BVPS
- American Association of Individual Investors: Using Book Value to Judge a Stock’s Worth
- Veristrat: What is Book Value Per Share and How to Calculate?
- Georgetown Law Library: Determining Company Status: Public v. Private
- The Street: Preferred Stock & Common Stock: What's the Difference?
- NASDAQ: Netflix, Inc. Form 10-Q – September 30, 2018
- NASDAQ: Apple, Inc. Form 10 – June 30, 2018