The book value that we have just calculated gives investors an idea of the underlying or intrinsic value of each share of the company, but of course, the actual market price of those shares, the price at which a share can be bought or sold on the stock exchange may differ, and that difference can be very significant.
Let's look at a couple of charts.
The first chart on the left hand side shows the book Value per Share of Apple from the 1st of October, 2022, as well as the market price of Apple shares from the same date.
Both lines appear to be reasonably close together, but this is just because we are using a secondary access for the market price.
In reality, both values are really very far apart.
On the last day of the chart, the book value of Apple was around $4 per share, whereas the market price per share was $176.65 per share.
The second chart on the right hand side makes this difference a little more obvious.
It tracks the so-called Price to Book Ratio, which is calculated by dividing the shares current market price by the book value of that share. The price to book ratio basically shows how much more or less investors are paying for a company shares compared to its net worth according to the balance sheet.
As we can see over the time period shown the price to book ratio for Apple ranged from a low of around 35 times to just above 50 times. On the last day of the chart, the price to book ratio was just under 45 times.
The question is why? Why would an investor pay 45 times the book value of the share? Or more generically, why is there a difference between the book value and the market value for Apple shares? There are of course many possible causes for this range.
Some of the more important ones are firstly, future growth expectations.
Probably the most obvious reason is that the balance sheet is backward looking while stock markets are forward looking.
If the market expects future growth and future profitability, this will be reflected in the share price, but not in the balance sheet.
Secondly, intangible assets.
This is another reason for a high price to book ratio, particularly for tech companies like Apple and Google.
The book value might not fully account for intangible assets like brand reputation, intellectual property, customer loyalty, and so on.
However, these intangible assets might allow the company to generate significant potential revenue.
They may have monetary value and are therefore factored into the market price.
Companies that have significant intangible assets, therefore might trade significantly above their book values as their book values do not fully include these assets.
Market conditions. Again, this may be another reason to explain a difference between price and book values.
Overall market conditions and sentiments can lead to investors valuing all companies or all companies in a specific sector, higher or lower, compared to their book value.
