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A company's book value is the worth of all their assets. What would cause a stock to trade below book value?

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  • Would it be better if I move my second paragraph to a separate question?
    – Bruce Alderman
    Nov 10, 2011 at 20:48
  • I would make it a second question. I think you'll get better answers that way.
    – Alex B
    Nov 10, 2011 at 22:48

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A company's stock value is indicative of the market's collective belief of the future of the company. The relationship of between price and book value will vary according to the quality of the company, the category of stock, etc.

In extreme cases, say Bank of America, the stock trades at a fraction of book, because BOA's books are a fantasy by most people's reckoning.

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  • +1 for "A company's stock value is indicative of the market's collective belief of the future of the company."
    – user4127
    Nov 11, 2011 at 20:52
  • I'm sure this can become a book. The way companies in different market segments might have book values not quite reflecting reality. As I understand it, Buildings and equipment get depreciated, so it's possible to have massive real estate that reflects little more than land value in that book number.
    – JTP - Apologise to Monica ♦
    Feb 5, 2012 at 0:31
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Discrepancies between what the book value is reported as and what they'd fetch if sold on the open market. Legal disputes in court.

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The key to evaluating book value is return on equity (ROE). That's net profit divided by book value.

The "value" of book value is measured by the company's ROE (the higher the better). If the stock is selling below book value, the company's assets aren't earning enough to satisfy most investors.

Would you buy a CD that was paying, say two percentage points below the going rate for 100 cents on the dollar? Probably not. You might be willing to buy it only by paying 2% less per year, say 98 cents on the dollar for a one year CD. The two cent discount from "book value" is your compensation for a low "interest" rate.

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    Yeah; you don't buy a $1 million factory to have your assets just sit there. You have perfectly safe Treasury bonds for that! You need to at least make a little bit of profit off of your investment.
    – user296
    Nov 17, 2011 at 23:37
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A company's book value is the worth of all their assets.

A companies book value is the value that accountants place on their assets, minus the accountants estimates of their liabilities.

The thing is most assets don't have a single well-defined value. The cost of acquiring an asset can be much greater than the money that could be recovered by liquidating that asset. Furthermore the money that could be recovered by liquidating an asset may not be known until you actually try to liquidate it.

Assets are normally entered onto the books at their purchase price and then depreciated according to a schedule. This is a reasonable method for valuing the assets in a going concern but it will often give values much higher than the "liquidation value" of the asset.

So in general, if you liquidate a company you won't get the full book value back.

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all of these examples are great if you actually believe in fundamentals, but who believes in fundamentals alone any more? Stock prices are driven by earnings, news, and public perception. For instance, a pharma company named Eyetech has their new macular degeneration drug approved by the FDA, and yet their stock price plummeted. Typically when a small pharma company gets a drug approved, it's off to the races. But, Genetech came out said their macular degeneration drug was going to be far more effective, and that they were well on track for approval.

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  • Prices move not only in response to actual value change, but in anticipation of value change. If that change turns out to be less than expected, there will be a price correction. This is part of why trading and investing are different games despite being played with the same tokens; in the long term these overshoots and corrections average out.
    – keshlam
    Dec 3, 2022 at 15:09
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"A company's book value is the worth of all their assets. A company's stock price is a reflection of how much investors are willing to pay for ownership in the company. If a company's stock price falls below book value, it may be because investors believe that the company has hidden risks or problems.

Investors might perceive a risk where there really isn't one. They might have concerns about management or other factors that they don't think are adequately reflected in the current price of the stock, and so they sell their shares, pushing down the share price and driving it below book value.

A stock trading below book value is an indication that investors are not confident in its future prospects."

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    Is this a quote from somewhere else?
    – Grade 'Eh' Bacon
    Dec 6, 2022 at 14:37

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