Book value and market value answer different questions.
- book value asks what the accounting records say a business is worth after liabilities
- market value asks what investors are willing to pay for it today
Because those questions are different, the numbers can diverge materially.
Book Value
Book value is based on the balance sheet:
$$
\text{Book Value} = \text{Total Assets} - \text{Total Liabilities}
$$
It is an accounting measure grounded in recorded asset and liability values.
Market Value
Market value reflects investor pricing in the market.
For a public company, equity market value is often expressed as market capitalization:
$$
\text{Market Capitalization} = \text{Share Price} \times \text{Shares Outstanding}
$$
That number moves with expectations, sentiment, growth assumptions, and perceived risk.
Why the Two Differ
Book value and market value differ because:
- accounting uses historical cost and formal recognition rules
- markets price future cash flow expectations
- intangible economic value may not sit fully on the balance sheet
- investors may discount weak asset quality or poor returns
A business with strong expected growth often trades above book value. A distressed or low-return business may trade below it.
Worked Example
Suppose a company has:
- total assets of
$1.2 billion
- total liabilities of
$800 million
Then book value is:
$$
1.2 - 0.8 = 0.4
$$
Book value is $400 million.
If its stock market capitalization is $900 million, the market is valuing the company at well above recorded book value.
Why Analysts Compare Them
The comparison helps analysts ask:
- is the company earning strong returns on its equity base?
- does the market expect growth far beyond recorded accounting value?
- are balance-sheet assets overstated or understated economically?
This is why price-to-book ratio remains a common valuation shortcut.
FAQs
Is market value always more important than book value?
Not always. Market value is critical for investors, but book value can still be a useful anchor in balance-sheet-heavy industries.
Can book value be higher than market value?
Yes. That can happen when investors expect poor future returns, weak asset quality, or financial stress.
Why do software companies often trade far above book value?
Because much of their economic value comes from future earnings power and intangible advantages that accounting book value may not capture well.