1.1.5.7 Market Value vs. Book Value of an Equity Security
For publicly traded stocks, the market value of the stock is the share price at which it is currently trading. The market value of the company is its market capitalization. As we have seen:
market capitalization = market share price x number of shares outstanding
The book value of a stock is the shareholders’ equity for common stock divided by the number of shares of common stock. This is called the stated book value of the stock. Stated book value is the theoretical amount of money left over for common stockholders if the company is forced to liquidate.
book value of a company = shareholders’ equity
Book value represents the current value of the company according to its own books and ignores future growth potential. Market value represents the market’s opinion as to the company’s near-term prospects.
Price to book is a ratio that compares the market value of a stock to its book value. Most companies that have been consistently profitable have a market value higher than book value, meaning the price to book is g