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How to Calculate Market Value Vs. Book Value

What a firm has on its books regarding the value of its assets very rarely bears a close relationship to the firm’s market value. Book value is driven by accounting conventions, which do not always define the value of series of assets if sold on the open market. Therefore it is important to periodically assess the market value of a business to know where you stand. The value of an owner’s equity, or ownership, in a business is the value of the assets minus the liabilities.

Instructions

    • 1

      Review the books to determine the carrying value of the firm’s assets. The book value of a business’s assets is the cost associated with acquisition minus any accumulated depreciation. U.S. Generally Accepted Accounting Principles, or GAAP, require that the accumulated depreciation of assets are listed separately from the asset accounts, so be sure to take that into consideration when determining the assets carrying value.

    • 2

      Call an appraiser to determine the value of large assets. Market value is the price a buyer would pay to acquire an asset from a seller in a market with many buyers. An appraisal is an estimate provided by a professional regarding the value of property, such as real estate or equipment, if it were sold.

    • 3

      Subtract the value of liabilities from both the book value and market value of assets. Liabilities should remain consistent between book and market value, as liabilities are legal obligations to pay a set fee regardless of market conditions.

    • 4

      Subtract the book value of equity from the market value to determine the difference between the two values.

Tips & Warnings

  • This methodology will not take into consideration the “goodwill” of a firm, or the value a business has due to its history and relationship with the market. While a valid intangible asset that is built through years of good relations with customers, it is harder thing to measure. Consult with an experienced financial analyst to gain the best understanding of the market value of your business.

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