For a starting businessman, investor, or property owner, one of the most important things to know about is the difference between BOOK VALUE and MARKET VALUE. With the use of these two values, one would be able to identify if their business/company is undervalued or overvalued. Yes, there is a close connection between these two things; however, it is necessary to identify the distinction of one from the other to make your investment worthwhile. As your friendliest bookkeeping and accounting firm, based here in Kearny, NJ, we are also a good source of reliable information regarding important matters related to your business anywhere here in New Jersey!
Let’s start by looking into the difference between a Book Value and a Market Value:
Basically, book value is the equity value or the total available fundings of the company/business from its shareholders based on its financial statements. It is determined by subtracting the total existing liabilities that a company has from that of the total value of the company’s existing assets. All existing assets and fundings of the business can easily be recorded and retrieved from the business’ Balance Sheet.
Balance Sheet – this is one of the three fundamental forms of financial statements. This is a record of the total assets of the company and how they are funded (through debt or equity). Through this form of financial statement, the book value would be a closer match to the actual company value.
Why is book value important?
If you are the owner of the business or the company, assessing the book value is important because it will give you an accurate picture of how much the company is worth. This will enable you to identify if the business/company actually has grown over time.
On the other hand, if you are an investor and you are eyeing a specific business to invest in, it is important for you to look into the company’s current book value in order to identify if it is undervalued or is poised to grow. This way, you can bargain deals on stocks.
Martha started her flower boutique business in 2012. Using her savings, she was able to establish a business with total assets of $40,000. After 5 years, the total assets of the company grew to $60,000. However, she has an unpaid liability of $15,000 from her friend John since she purchased additional equipment and supplies within those five years. Now, if we are going to compute the current book value of Martha’s flower boutique (assets minus the unpaid liabilities), it will equate to $45,000. Meaning, that within the span of 5 years, the assets of the business grew $5,000 dollars despite the liabilities incurred.
In simple terms, Market Value is the value of a certain business/company when it is sold in the market. Unlike book value, which can be easily identified and has rare adjustments, there is a highly dynamic movement in market value. One of the main things that would affect the fluctuations for a certain company’s market value is the changes associated with its stock price.
Stock Price – this is the current price of a certain share when it is traded in the market. Now, whenever a publicly-traded company is established, it is given a price in relation to its value within the current market. Over time, the stock prices of a single business may fluctuate over time as they might be affected by various factors like changes within a certain economy; war; political events; changes in the industries; and environmental changes.
Why is market value important?
Since there are changes in the value of each and every asset within a single company, it is important to take a look at how these different types of assets have depreciated or appreciated over time. This is an easy way of knowing if there was a growth in the value of the company, or it is already undervalued.
Since market value is greatly affected by different factors in the market and is fluctuating almost every second, there would be a difficulty in computing the real-time market value of a specific business/company. Especially that there are differences in the supply-and-demand of different industries.
Now that we have a clearer view of the difference between the two, it is now easier for us to identify if the business/company/asset is under- or overpriced. How? By simply finding the difference between the asset’s business value and market value. If the total book value of all the assets within the business is higher than their current total market value, then it can be incurred that the company is currently undervalued.
On the other hand, if the results would be otherwise, then there has been a growth within the business. There are two things that can greatly affect the rise of market value: (1) the company has purchased a specific asset in the past which has an increased value over time; and (2) the company has made some valued intangible assets such as copyrights, patents, trademarks, etc.
In conclusion, it is essential for all business/company accountants and owners to make sure that all the financial records of the company are duly documented in order to come up with an accurate equivalent for the company’s book and market value. Through this, it would be easier to assess the growth of the company or otherwise have sufficient knowledge if the company is losing funding/resources.
If you would want to have more ideas about this matter, Nicholas J. Coco, CPA can gladly assist you. We are a bookkeeping and accounting firm that is currently based here in Kearny, NJ, but we can provide our services to anyone within the state of New Jersey. Simply give us a call at 201-955-3100 so that we can assist you immediately.