Question

Why is the difference between market and book value important? What measures are used to assess financial performance?

Answer 1

market value may be defined as the purchase cost of the asset. market value is defined as the price that can be derived on selling an assets in the open market.The main difference between market value and book value is market value is the based on the supply and demand of an asset and book value is the historical cost that recorded in the books of accounts. book value is measure from the balance sheet. it is actually the difference between the value of assets and liabilities. according to stock market the market value is the price quoted in the market that is based on the demand and supply.

The following are the measures that can be used to know the financial performance:-

liquidity ratio like cash ratio and quick ratios.

turnover ratios like assets turn over ratio.

efficiency ratios.like inventory ratio and average collection period

profitability ratios like net profit margin, return on equity

leverage ratios debt equity ratio and debt to equity ratio