What Is the Difference Between Book Value & Market Value Per Share of Common Stock?

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A discrete relationship between book and market value does not exist. The ratio of market price to book value may indicate an undervalued company. Investors search balance sheets to find undervalued assets.

Definitions

Book value refers to the cost of a certain asset, which cannot change as long as the asset remains on the company's books. Capital accounts and retained earnings relate to book value. Conversely, market value of the asset reflects the current price at which it may be sold.

Significance

A factory, built 20 years ago for $100,000, may have a higher or lower market value today. Market value requires a buyer for a seller of the asset. If the factory sells for $200,000, that is the asset's market value. The book value, reflecting the original cost basis, cannot change.

Considerations

In this example, the difference between the book and market values shows a profit. The factory remains on the company's balance sheet at book value according to generally accepted accounting principles (GAAP) until it is sold.

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