What is the difference between book value and market value?
A company’s balance sheet indicates how financially health the company is. In this way it is like a medical report because it shows where there are problems that need to be fixed. When the balance sheet shows a profit, this means the company is healthy. When it shows a loss, this means that the company is ill.
One of the important figures that is quoted in a balance sheet is that of book value. This refers to the worth of the company as a total of the value of all its assets. Since the market can also determine the value of these assets, market value is important but it is not included on the balance sheet because it can change according to the market changes. Investors, though, need to study both the book value and the market value before deciding to invest.
What is book value?
The net worth of a company is its book value. This is the combined total value of all the company’s assets – everything that it owns. Investments that take place outside the realm of the company but are still company owned are also included and can be either performing or non-performing assets. Every year these assets depreciate in value and so the book value also decreases.
What is market value?
The market value is the worth of a company if it were to sell off its assets at a given time. The market value can change on a daily basis and it may be higher or lower than the book value. Intangible assets, such as copyrights and patents, are included in market value and increase it as do the human resources of a company.
Both book value and market value have a role to play in determining the net worth of a company. The book value is reported so that investors know what the assets are worth. The market value is not reported because it can change every day depending on the market conditions. The experts figure out the market value and it does not have to be reported to the stakeholders. It is important to know what both of them are if the company is going public because this is the financial information that potential investors consider.
How book value and market value differ
The book value is the true measure of a company’s worth because it tells the value of all the assets each year with the depreciation factored in. The market value refers to how much money the company would stand to take in if it were to sell any or all of its assets on any given day.
Book value is based on the value of tangible assets, but market value includes the intangible assets. Book value is also done for a fixed period of time, but market value is only considered if the company is thinking or selling or if it will become a publicly traded company.