Is the book value of a firm always going to be lower than the market value?
- TedLv 79 years agoFavorite Answer
Usually. There can be exceptions. The reason is that accounting rules don't have any way to value many assets that are generated by the company, like patents, trademarks and goodwill.
The stock market realizes that Eli Lilly has patents on drugs and includes these when it values the stock. The scientists who created the drug had their salaries expensed in the years they were paid and the patent is carried on the books at zero. The Coca-Cola company has spent a lot of marketing money building up a following for Coke, but, since they didn't buy the trademark for Coke for cash from somebody else, it's carried at zero.
- ProfessorOddlotLv 49 years ago
No, not always. I just ran a stock screen using TD Ameritade and initially found over 3,000 stock that came up with a book value less than 1.0, most of which are in bankruptcy. When I refined the screen for stocks with a book value of between 0.90 and 1.0 and a market cap over $1 billion I got 98 stocks.
Does this screen mean those are worthwhile stocks? Not hardly. Many other questions to ask. The fact that many on the first list are in bankruptcy reveals a lot here. For example, if the market price of the stock is less than the book value then it tells you that the amount of that book value that's available to the common shareholder is slim, and further, that perhaps the value of the assets or liabilities on the books is questionable.
- Bob SacamanoLv 59 years ago
A company is valued primarily on its ability to generate income and the likely future stream of income. That is usually worth far more than the value of its assets.