Book Value vs. Market Value: What's the Difference?

Book Value vs. Market Value: An Overview

Although investors have many metrics for determining the valuation of a company's stock, two of the most commonly used are book value and market value. Both valuations can be helpful in calculating whether a stock is fairly valued, overvalued, or undervalued. In this article, we'll delve into the differences between the two and how they are used by investors and analysts. 

Book Value

The book value of a stock is theoretically the amount of money that would be paid to shareholders if the company was liquidated and paid off all of its liabilities. As a result, the book value equals the difference between a company's total assets and total liabilities.

Book value is also recorded as shareholders' equity. In other words, the book value is literally the value of the company according to its books (balance sheet) once all liabilities are subtracted from assets. 

The need for book value also arises when it comes to generally accepted accounting principles (GAAP). According to these rules, hard assets (like buildings and equipment) listed on a company's balance sheet can only be stated according to book value.

This sometimes creates problems for companies with assets that have greatly appreciated; these assets cannot be re-priced and added to the overall value of the company.

Calculating Book Value

Below is the balance sheet for the fiscal year ending in 2023 for Bank of America from the bank's annual report.

• Assets totaled $3.18 trillion.
• Liabilities totaled $2.89 trillion. 
• The book value was $290 billion as of the end of 2023.

In theory, if Bank of America liquidated all of its assets and paid down its liabilities, the bank would have roughly $290 billion left over to pay shareholders.

Market Value 

The market value is the value of a company according to the financial markets. The market value of a company is calculated by multiplying the current stock price by the number of outstanding shares that are trading in the market. Market value is also known as market capitalization. 

For example, as of May 29, 2024, Bank of America had 7.82 billion shares outstanding while the stock closed at $38.72, making Bank of America's market value or market capitalization $303 billion (7.82 billion x 38.72).

Special Considerations

When the market value of a company is less than its book value, it may mean that investors have lost confidence in the company. In other words, the market may not believe the company is worth the value on its books or that there are enough future earnings. 

On the other hand, value investors might look for a company where the market value is less than its book value hoping that the market is wrong in its valuation.

For example, during the Great Recession, Bank of America's market value was below its book value. As of 2024, the company's market value is no longer trading at a discount to its book value. 

When the market value is greater than the book value, the stock market is assigning a higher value to the company due to the earnings power of the company's assets. Consistently profitable companies typically have market values greater than their book values because investors have confidence in the companies' abilities to generate revenue growth and earnings growth. 

When book value equals market value, the market sees no compelling reason to believe the company's assets are better or worse than what is stated on the balance sheet.

Book value and market value are two fundamentally different calculations that tell a story about a company's overall financial strength. Comparing the book value to the market value of a company can also help investors determine whether a stock is overvalued or undervalued given its assets, liabilities, and its ability to generate income.

With any financial metric, it's important to recognize the limitations of book value and market value and use a combination of financial metrics when analyzing a company.

The Bottom Line

Book value and market value are two different ways to value a company. Book value focuses on the balance sheet and compares a company's assets to its liabilities to determine how much equity would be left over after it fulfilled all of its obligations.

Market value is focused on a company's share price, so it focuses more on a company's perceived worth and multiplies the number of shares outstanding by its share price. The two metrics can be compared to each other to help determine whether a stock is overvalued or undervalued.