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Understanding the true value of a company is a key part of stock analysis. Two common metrics used for this purpose are book value and market value. While book value refers to the net value of a company as per its financial statements, market value reflects what investors are willing to pay for it on the stock exchange. These values often differ—and the difference can be a signal worth studying. This article outlines the definitions, formulas, differences, and uses of both values and explains their relevance in evaluating stocks.
Book value, also known as net asset value, represents the value of a company’s assets minus its liabilities as recorded on its balance sheet.
Book Value = Total Assets – Total Liabilities
This figure reflects the accounting worth of the company, assuming all liabilities are settled and assets are sold at their recorded value.
Acts as a baseline for evaluating undervaluation or overvaluation
Useful in assessing company solvency and financial stability
Helps in long-term, fundamentals-based investing
Book value is static and historical—it does not always reflect a company’s future potential or intangible assets like brand value.
Market value (or market capitalisation) is the current trading value of a company’s shares on the stock exchange.
Market Value = Share Price × Number of Outstanding Shares
Market value reflects investor perception, sentiment, future growth expectations, and real-time demand-supply dynamics.
Determines a company’s size and weight in indices
Reflects real-time investor sentiment and outlook
Aids in peer comparison and risk profiling
Unlike book value, market value fluctuates continuously based on trading activity and macroeconomic conditions.
Each value has distinct relevance in different contexts and investment styles.
| Basis | Book Value | Market Value |
|---|---|---|
Definition |
Value based on accounting data |
Value based on current share price |
Data Source |
Balance sheet |
Stock market |
Frequency of Change |
Periodic (quarterly/annually) |
Real-time fluctuation |
Reflects |
Historical cost and financial condition |
Investor perception and market expectations |
Includes Intangibles |
Usually excludes brand, goodwill, etc. |
May price in intangibles and potential |
Usefulness |
Valuation, solvency analysis |
Trading, investing, M&A decisions |
The Price-to-Book (P/B) Ratio measures how a company’s current market price relates to its net asset value recorded on the balance sheet.
P/B Ratio = Market Price per Share ÷ Book Value per Share
This ratio helps assess whether a stock is overvalued or undervalued relative to its net assets.
P/B < 1: Stock may be undervalued or the company may be in financial distress
P/B > 1: Stock is valued above book value, possibly due to strong intangibles or growth potential
P/B ratios vary across sectors. Capital-intensive sectors like manufacturing usually have lower P/B, while technology firms tend to trade at higher multiples.
Consider the following example:
Assume:
Total Assets: ₹1,000 Cr
Total Liabilities: ₹400 Cr
Outstanding Shares: 10 Cr
Current Share Price: ₹90
Calculations:
Book Value = ₹1,000 Cr – ₹400 Cr = ₹600 Cr
Book Value per Share = ₹600 Cr ÷ 10 Cr = ₹60
Market Capitalisation = ₹90 × 10 Cr = ₹900 Cr
P/B Ratio = ₹90 ÷ ₹60 = 1.5
The stock is trading at a 50% premium to its book value, suggesting that the market anticipates stronger future performance.
Book value is more useful when:
Analysing asset-heavy industries like manufacturing, real estate, and infrastructure
Evaluating liquidation scenarios
Investing in deep value or turnaround opportunities
Estimating downside risk (a floor value)
It is less effective for service-based companies where intangible assets dominate.
Market value is more relevant when:
Assessing a company's size and market sentiment
Evaluating growth-stage businesses
Comparing peer companies within the same industry
Analysing portfolio allocation or exposure
It is dynamic and responsive to news, earnings, and investor behaviour.
Investors are encouraged to use these values as part of a broader analytical framework including earnings, cash flow, and qualitative factors.
| Metric | Limitation |
|---|---|
Book Value |
May not reflect true current value of assets |
Market Value |
Influenced by volatility, speculation, or sentiment |
Knowing when to apply each helps avoid misinterpretation.
| Situation | More Useful Metric |
|---|---|
Liquidation or Bankruptcy Analysis |
Book Value |
Mergers and Acquisitions |
Market Value + Premium |
Value Investing |
Book Value & P/B Ratio |
Growth Investing |
Market Value & P/E |
Sector Comparison |
Market Capitalisation |
Book value and market value are essential tools for understanding a company’s worth from different perspectives. While book value provides a grounded, accounting-based view of tangible worth, market value captures investor perception and future expectations. Using both in tandem can help investors build balanced views—especially when comparing stocks or screening for value opportunities.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Not necessarily. A high P/B may reflect investor confidence, strong earnings potential, or valuable intangibles like brand or IP.
Yes. If liabilities exceed assets, book value becomes negative—often signalling financial distress.
Market value accounts for future expectations and investor sentiment, while book value is based on historical cost and tangible assets.
It’s more relevant for asset-heavy firms than for technology or service-based companies with intangible-driven valuations.
Stock indexes like Nifty or Sensex use market capitalisation (i.e., market value), not book value.
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Posted on 19 Dec
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