If a share’s market value is significantly higher than its book value per common share, this usually indicates investors believe the company has excellent future prospects for growth, expansion and increased profits that eventually raise the book value of the company. They may also believe the actual value of the company is higher than the current book value calculation shows. In other words, the book value is inaccurate.

If investors are mistaken in their assessment of the company, a substantially higher market value simply means the stock is presently overvalued and will most likely fall in price as investors realize their expectations for the stock as being overly optimistic. A stock with a market price substantially higher than its indicated book value may be appealing to growth investors; value investors are likely to shy away from it as they prefer to invest in stocks they believe are undervalued.

The book value per common share, or BVPS, is a tool of financial measurement for the minimum per share value of a company’s equity. Specifically, this value relates the base common stock value that has been adjusted for inflow and outflow. The book value per common share is only one tool investors can utilize to help determine whether a stock is undervalued. However, BVPS should not be used alone; it presents a rather narrow scope of the company’s overall situation and does not take into account potential future growth. The price/earnings, or P/E, ratio offers an alternative stock value assessment, as does the price/earnings to growth ratio (PEG), a measurement that attempts to factor in likely future growth.

  1. Who uses book value to estimate the value of a company?

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  2. What is the difference between book value and market value

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  3. What is the difference between book value per common share and NAV (net asset value)?

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  4. What is the difference between Book Value Of Equity Per Share (BVPS) and book value ...

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  6. What's the difference between book and market value?

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