Question

Why the Book Value per Share differs from the company’s stock price? Please explain how the PE ratio is utilized for financial analysis purposes by market analysts. Minimum of 150 words.

Answer 1

Book value per share is calculated by the value of the shareholders equity by the number of common shares outstanding. Shareholders equity here is the difference between assets and all liabilities excluding equity. It is the theoretical value of the stock as per the accounting records and financial transactions of a company. On the other hand, market value of a firm is as per the financial market scenario and is largely based on the stock's demand and supply situation. If the firm's stock has a higher demand in the market and is bullish, the market value goes up and vice -versa. Market value of the stock also influenced by multiple factors such as investors preference, stock market situation, government regulations and decisions, financial statements of the company among others. To conclude, book value is based on the financial strength of the company and market value is on the market perception.

Price Earnings ratio is the ratio of the market price of the company to its earnings per share. Market analysts usually use P/E ratio to find if the stock is overvalued or undervalued and also if the market value of the price justify the return on the stock (through EPS).