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

  • Would it be better if I move my second paragraph to a separate question? – Bruce Alderman Nov 10 '11 at 20:48
  • I would make it a second question. I think you'll get better answers that way. – Alex B Nov 10 '11 at 22:48

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 '11 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 '12 at 0:31

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 '11 at 23:37

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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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.

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

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