Book Value vs. Market Value: Key Differences and Why They Matter to Investors

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.

Formula:

• 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.

Importance of Book 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.

Formula:

• Market Value = Share Price × Number of Outstanding Shares

Market value reflects investor perception, sentiment, future growth expectations, and real-time demand-supply dynamics.

Importance of Market Value

• 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.

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.

Formula:

• 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.

Interpretation:

• 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.

Knowing when to apply each helps avoid misinterpretation.

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.