Book value<\/b> = Total assets<\/b> \u2013 Total liabilities<\/b><\/p><\/div><\/article>
So how do you find a company\u2019s total assets and liabilities? This information is found on a company\u2019s balance sheet, which is typically found in the investor relations section of a company\u2019s website. You can also try looking up \u201cCompany ABC balance sheet\u201d followed by the current year on Google.<\/p>
Let\u2019s calculate the book value of a major company like Microsoft. These values are taken from its Earnings Release FY21 Q2.<\/p>
- Total listed assets: $304,137 million<\/li>
- Total liabilities: $173,901 million<\/li>
- Total assets minus total liabilities: $130,236 million<\/li><\/ul><\/div>
You can also skip the math as book value is often reported as \u201cshareholder\u2019s equity\u201d or \u201cstockholder\u2019s equity\u201d on a company\u2019s balance sheet.<\/p>
What is book value per share (BVPS)?<\/h4>
If you divide the book value by the number of outstanding shares, you get the book value per share. Outstanding shares are all of a company\u2019s stock shares that people hold in the stock market. This can help you determine whether a stock is undervalued or overvalued. When book value per share is higher than a stock\u2019s market price, it could mean the stock is undervalued.<\/p>
According to Microsoft, the company had 7,542,215,767 outstanding shares as of January 21, 2021. So its book value per share is roughly $17.27.<\/p><\/div><\/article>
What is market value?<\/h3>
The market value of a company is the current price of a single share of its stock multiplied by the number of outstanding shares held by all shareholders in the market. This is also known as the company\u2019s market capitalization.<\/p>
It essentially tells you what investors are willing to pay for a company\u2019s stock based on all publicly available information. It also tells you how much shareholders would get if the firm decides to liquidate the company.<\/p>
Market value formula<\/h4>
Also called market capitalization, the market value of a company is the price of a single share of stock multiplied by the number of outstanding shares. Here\u2019s the formula.<\/p>
Market value<\/b> = Price of a single share of company stock<\/b> x Number of outstanding shares trading in the market<\/b><\/p><\/div><\/article>
Let\u2019s revisit Microsoft. The price of a single share of Microsoft stock is $237.58 as of March 23, 2021, when the Nasdaq closed. It currently has roughly 7,542,215,767 outstanding shares. So if you multiply these 2 figures, Microsoft has a market value of $1.79 trillion.<\/p>
How to interpret book value and market value<\/h3>
The market value and book value of a company can vary by a large margin. Comparing these 2 metrics can help you determine whether a stock is overvalued, undervalued or rightly priced in the market.<\/p>
Book value is greater than market value<\/h4>
If the book value of a company is greater than its market value, it could mean investors aren\u2019t confident about the company\u2019s financial performance or future.<\/p>
Remember, book value is the value of a company based on its books or balance sheet. Market value depends on what investors are willing to pay for the company\u2019s stock. So if book value is greater than market value, it could mean investors don\u2019t believe the company is worth the price on its books.<\/p>
But it could also mean the market is wrong in its valuation of a stock, so value investors may seek out these companies in hopes that they can buy the stock and sell it for more than what the market currently values it at.<\/p>
In other words, they\u2019d be buying stocks at a discount in hopes that it will improve in the future. This scenario might behoove long-term investors, but active day traders may not benefit much from companies that have greater book values than market values.<\/p>
Market value is greater than book value<\/h4>
In some instances, market value may be higher than book value. In our previous example, we found Microsoft has a much larger market value ($1.79 trillion) than book value ($130,236 million).<\/p>
This could mean the company\u2019s stock is overvalued, which in turn can mean that investors are confident in the company\u2019s future earnings potential. In such cases, investors would be confident paying more for a stock because they believe the company could boost its financial strength based on its current state and plans for the future. But the downside is that the company\u2019s stock may be selling for more than it\u2019s actually worth.<\/p>
Book value is equal to market value<\/h4>
If a company\u2019s book value is equal to its market value, it could simply mean that the market is accurate in its valuation of its stocks. And investors are paying for exactly what the stocks are worth<\/a>.<\/p>
This could be a good sign for risk-averse investors who just want to buy stocks for what they are worth and aren\u2019t very interested in timing the market. In other words, this situation may appeal to investors who don\u2019t want to gamble on whether a stock is overvalued or undervalued.<\/p>
Market value and book value are two useful metrics that can help you determine the true value of a company\u2019s stock. But before you can buy a company\u2019s stock, you need to open a brokerage account.
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