What is the "book value" of a company, and why is it usually so much lower than the market cap?

Answer 1

Book value of a company is the value of total assets on the accounts (aka "books" thus the term "book value"). The value is usually recorded at time of purchase. It is important to note that the asset value comprise both the liabilities and ownership portions.

Asset = Liabilities + Equity

- essentially explaning that the book value is actually funded by both the borrowings (liabilities) and owners (equity)

On the other hand market capitalisation is the value of the equity by market perception. While "book value" is larger than the equity value, its is important to note that market value of shares includes the value of the "books" as well as its earning potential. In the extreme case where the company no longer has earning potential, the market capitalisation will (in theory) be = the book value - liabilities owed. However as market capitalisation includes the earning potential, it is higher than total value what the assets of the firm is worth.

Let me give you an example, when you purchase a Microsoft share, you're not buying it because its sitting on pile loads of Microsoft XP & Microsoft office software, not are you buying a Microsoft share because you think that Bill Gates furniture is worth a lot, rather because you believe that Microsoft will continue to grow in years to come as the increasing computer usage in countries such as Russia, China, India, etc will drive Microsoft products, thus you are willing to pay more that what Microsoft has on its books.

Answer 2

Book value is the strict accounting value of a company. Market cap is the stock market's judgment of the value of the organization as a going concern.
As an example, a company takes 50 engineers already on staff and trains them on new technology at a cost of $30,000 each (not a hard number to get to if salary and benefits are included). Generally the $1,500,000 just spent is reflected as an expense for book purposes (the book value will go down). But if the market judges that this is a good investment and that the company will now be able to make a new product then the market value may well go up.
Advertising has a similar impact.

Answer 3

Book value is essentially an accounting value for the firm. When you buy or start a company, you're paying for the assets, etc. That essentially is the book value.

However, there are some assets that aren't tangible (goodwill, patents, trademarks, etc). These intagible assets are part of market cap, but not book value.

If you were to buy Coca Cola, the assets would be much less than you'd have to pay for the company. The price you'd pay is the market cap. The price of the assets is essentially book value.

Hope that helps!

Answer 4

Book value how much it's assets would sell for if it went bankrupt.

Market Capitalisation is the value of all the shares of stock at the current price.

Answer 5

those are two different terms. book value is generally the company's assets. market cap is the total value of the company. you can actually go to http://investorwords.com or http://investopedia.com to learn more about those terms.

Answer 6

at present-potential....in laymans terms, I was a stock-broker for most of my working career.