The book value of equity of a company is the difference between its total assets and its total liabilities. It’s the value derived from a company’s books or financial statements.
What does book value of equity mean?
In a company, the book value of equity is referred to as shareholders’ equity. It is the amount that the shareholders own after the company’s liabilities have been paid off.
It’s important to remember that the book value of equity may not accurately reflect the company’s worth. For example, the market value of certain assets may be much higher than the amount that is reflected in a firm’s books. This could be particularly true of fixed assets like land. If a company had acquired land many years ago, its market value might be much higher than its original cost.
Another aspect to be considered when reviewing the book value of equity is the market value of the company according to its share price. This market value can be arrived at by multiplying the shares outstanding by the current market price of the company’s stock.
In many cases, the market value calculated in this manner exceeds book value of equity by a wide margin. That’s because investors expect the company to increase profitability and provide them with an enhanced level of returns in the future.
Example of book value of equity
The market value of companies like Apple and Amazon is far higher than their book values:
The book value of one Apple share is only $25.67. But its market value is $190.58. That’s a multiple of over seven times. Similarly, the book value of Amazon’s share is $64.87 against a market value of $1,739.02, a multiple of almost 27 times.
Why does the market value exceed book value by such a wide margin? Consistently profitable companies that are growing quickly can see their share prices climb rapidly. Amazon’s share has gained 72% in the last one year. The value of Apple stock has increased by 29%.
The book value of equity can be considered to be the amount that the owners of the company will receive if the business is closed down and its liabilities paid off. In many instances, and especially in the case of companies that have a sound business model and efficient management, the market value exceeds the book value of equity by a wide margin.