What Is The Difference Between Market Value and Book Value?

Market value or relevant market value for companies traded on various stock exchanges. These companies have shares that are traded every trading day on different exchanges. For example, if a company has a million shares and if the share price on the stock exchange on a given day is one dollar, then the market value of the company is one million dollars.

That is, the market value expresses the value of all the company shares on a particular day. By its very nature, the share price may change daily, and as a result, the market value may vary.

In our example, if tomorrow the stock price rises to two dollars, the company's market value will increase to two million dollars.

In our example, if tomorrow the stock price rises to two dollars, the company's market value will increase to two million dollars.

On the other hand, the Book Value is the value of the equity or the value of the shares as stated in the firm's financial statements. The book value depends on the number of shares recorded in the company's books and the nominal value of the share.

For example, if a company has a million shares, with a nominal value of each share being one dollar, the book value will be 1 million dollars.

The number of company shares used in the company's books or financial statements is fixed. This means that as long as the number of shares in the company is not changed or the nominal value of each share is not changed, the company's book value will remain constant.

When do we use the market value of a company?

The market value of a company is relevant only to companies whose shares are traded on the stock exchange. That is, for public companies. Private companies are companies whose shares are not sold on the stock exchange. Therefore their market value does not exist.

What is the downside of a company's market value?

Because the market value of a company is based on the stock price on the stock exchange, and because the stock price on the stock exchange changes every day, the company's market value can change every day. On a particular day, it could be a million dollars, and on the second day, it could be two million dollars.

To what extent does the book value express the actual value of the shares?

Most of the time, the book value will remain the actual value of the shares. The reason is simple. The value is derived from the economic activity of a company. The more the company grows, the more revenue and profits the company will have, and the more the company's value is expected to increase.

Despite this increase, the equity section in the balance sheet can remain constant, and it will not reflect the change in the company's value.

This means that most of the time, the book value will not have any meaning regarding the company's actual value.

When do we use a company's book value?

Although the book value of a company has no real meaning when it comes to the value of the company, it will be helpful. When we can estimate the company's value, you will have to use certain financial relationships, such as financial leverage.

Financial leverage is equal to the ratio between debt and equity.

The financial leverage can be used to evaluate various parameters in the valuation, such as the weighted average capital price is the discount rate.

 In these cases, you can use the book value of the equity and the debt value to understand the company's financial leverage. That is, it can help us know what the various parameters are worth that can help with the valuation.

Conclusion

It is very convenient to use the market value of a company and, from that, derive and understand something about the value of the company. In practice, again, this is not relevant for private companies and is not permanent in relation to public companies.