Book Value vs Market Value
Balance sheet of a company is like a medical report of a person and it clearly indicates the health of the company. A profitable balance sheet shows that the company is in good shape and the vice versa. There are several critical things mentioned in the balance sheet and book value is one of them. The book value shows the worth of a company as it includes the value of all the assets that a company owns. Market value of the company is not indicated in the balance sheet and it is dependent on many other factors. Any one deciding to invest in a company has to study both its book value and the market value to get good returns.
Book value of the company is the net worth of the assets that a company owns in the shape of machinery, building, stock of raw material or finished goods and investments done in other ventures these are also known as performing and non performing assets. Out of these assets some are profit making and others are non profit making. These assets are also depreciating and appreciating in nature therefore the book value of the company changes from year to year.
The market value of the company can be defined as the company’s worth on a given day if it is to be liquidated on that particular day. The worth of a company according to market value depends on its assets, its good will and its intangible assets. Intangible assets are the assets like copyrights and patents that increase the market value of the company. The human resources of a company greatly influence the market value of the company.
Both book value and market value are important in calculating a company’s worth, the book value of a company is mandatory to be reported so that the investors of the company can know company’s worth. Market value is assessed by the experts only and its disclosure is not mandatory. The summation of book value and market value becomes important if it is to be acquired or if a company is going public. A good book value and market value is a good source for investment to get good returns.
Differences between book value and market value
The book value and the market value of a company can be very different. The book value is the true indicative of the company’s worth where as market value is the projection of company’s worth. Book value is calculated on the basis of all the tangible assets which are physically present with the company and can be touched, felt or sensed. The market value is calculated according to the book value plus the value of intangible assets. The book value is generally calculated at a fixed interval of time to assess the company’s performance where as market value is calculated only in cases of acquisitions and mergers.