Is the Book Value of an Asset the Same as the Market Value?
In the world of finance there are two values given to an asset. They are the book, or accounting value and the market, or investment value. Accounting value is based on the value of an asset on the books, which is usually based on costs. Market value is based on supply and demand in the market. Investors use the two indicators to find assets that are under- or over-valued in the market.
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Balance Sheet Book Value
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Book value is the value of an asset once on the books. The value of assets is listed on the balance sheet. Those assets that will be used within the year are listed as current assets. Liabilities and stockholders' equity are also listed just below the assets on the balance sheet. The difference between the cost of the asset and the debt associated with the asset is referred to as the asset's book value. Stockholders' equity represents the book value of the firm's total assets.
Market Value
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Market value is difficult to determine for some assets. Some assets, such as stocks, are traded on an open exchange and a price is readily available. Other assets, such as real estate, must be assessed on a case-by-case basis. The market value of real estate is the price that someone is willing to pay. Appraisers use comparable sales in the same area to market value for real estate.
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PE Ratio
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One commonly used metric to assess the book value of an asset in comparison to the market value is the price-to-earnings ratio (PE ratio). The price is the market value of the stock and earnings are referred to as earnings per share (EPS) on the income statement. For instance, if company earnings are $5 per share for the most recent year and the current share price is $100 per share, the price-to-earnings ratio is 20 ($100/$5). A higher PE ratio in comparison to other companies in the same industry is indicative of a company which is overvalued in the market. In other words, the market value of the asset is likely higher than the company's book value, as measured by earnings.
Over- and Under-Valued
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In the end, the book value of an asset can be the same as the market value, however, it is unlikely. Investors look for opportunities to buy companies or assets that are under-valued or sell companies that are over-valued in the market compared to book value.
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