Question

What does it mean when a company's book value per share is less than the market value per share of a common stock? Should this be a key concern for an investor?

Answer 1

Answer :

• Company's book value per share = (Total assets - Total liabilities) / Number of Common Shares issued. It is nothing but value of the business per share according to financial statements.
• Company's market value per share is the value of the company's per share as per stock market. It states the current market price of the share.

When  book value per share is less than the market value per share , it indicates that market force no longer believes that the company can generate profit or cash flows in near future. Such situation may arise due to many reasons like problem or loss in operation of the business , mismanagement problems or sometimes it also indicates that the book valuation done by the company is not correct or it is overvalued .

Key concern for an investor :

•   When  book value per share is less than the market value per share it means that the shares of the company are trading at discount in stock market . Now if the investor finds out that the reasons of such situation is temporary or it is just a market perception and the fundamentals of the company are strong then it creates an opportunity for the investor to buy those shares at low market price in anticipation that in future market perception will again change and the price of the shares will rise.
• However it is not necessary that market perception will change in near future or it may not change at all. Thus it is always important that an investor must study and analysis such situation thoroughly .