Why The Book Value Of Equity Is Different From The Market Capitalisation

The market to book ratio or price to book ratio is used to compare the current market value or price of a business to its book value of equity on the balance sheet.

Why the book value of equity is different from the market capitalisation. Book value of equity of any company is calculated from its financial statements whereas its market value of equity is calculated from the market price of each share. Market capitalization value is nearly always greater than equity value since investors figure in factors such as a company s expected future earnings from growth and expansion. That s because every business is required to continually record holding losses and gains on the securities they hold.

The ratio tells us how much. Why is book value higher than market value. Weighted average cost of capital wacc is defined as the weighted average of cost of each component of capital equity debt preference shares etc where the weights used are target capital structure weights expressed in terms of market values.

This then equates book value to market value. We will discuss the difference between book value wacc and market value weights and why market value weights are preferred over book value weights. An investor can calculate the book value of an asset when the company reports its earnings on a quarterly basis whereas market value changes every single moment.

Market capitalization value is nearly always greater than equity value since investors figure in factors such as a company s expected future earnings from growth and expansion. Book value of equity total assets total liabilities. Now when book value and market value are very different from one another it becomes practically impossible to pin down a company s value.

Market value is the current stock price times all outstanding shares net book value is all assets minus all liabilities. The market value of equity is very different from the book value of equity. 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.

It is quite common to see the book value and market value differ significantly. Market capitalization or market cap is the market value of all of a company s common stock. When it comes to multiple assets market value is often lower than book value.