1 00:00:01,290 --> 00:00:06,110 What is the first thing that comes to mind when you think of the word value? 2 00:00:07,870 --> 00:00:09,920 Value is a fascinating topic. 3 00:00:09,920 --> 00:00:14,050 For a lot of people, when they hear the word value, they think of price. 4 00:00:14,050 --> 00:00:18,580 Or how much one values a friend, or perhaps it's a motto to live by. 5 00:00:19,610 --> 00:00:21,384 That's all perfectly fine. 6 00:00:21,384 --> 00:00:25,914 But when it comes to business and specifically finance and accounting, 7 00:00:25,914 --> 00:00:28,150 value has some concrete meanings. 8 00:00:29,180 --> 00:00:33,070 In this video, I want to explain the difference between book value and 9 00:00:33,070 --> 00:00:33,770 market value. 10 00:00:35,570 --> 00:00:39,670 Earlier in the course, we've touched on the concept of book value. 11 00:00:39,670 --> 00:00:43,190 This is the dollar figure associated with particular line items 12 00:00:43,190 --> 00:00:45,000 on the balance sheet. 13 00:00:45,000 --> 00:00:49,020 If someone asks what the book value of your current liabilities is, 14 00:00:49,020 --> 00:00:51,190 then you would go to the balance sheet and look for 15 00:00:51,190 --> 00:00:53,380 the dollar figure on the current liabilities line. 16 00:00:54,680 --> 00:00:58,360 Usually in everyday situations, people wanna ask that. 17 00:00:58,360 --> 00:01:01,760 They'll just ask you what your current liabilities are? 18 00:01:01,760 --> 00:01:04,120 But that is technically a book value. 19 00:01:05,260 --> 00:01:06,430 It's more common for 20 00:01:06,430 --> 00:01:11,040 someone to ask about book value in the context of your overall business. 21 00:01:11,040 --> 00:01:14,360 What's the book value of the business? 22 00:01:14,360 --> 00:01:16,770 To answer that, you'd go to the balance sheet and 23 00:01:16,770 --> 00:01:19,550 look at the number in the total equity line. 24 00:01:19,550 --> 00:01:21,710 And that's the book value of the business. 25 00:01:22,860 --> 00:01:27,600 Some people might ask what is essentially the same question in a different way 26 00:01:27,600 --> 00:01:30,610 by asking, what are your net assets? 27 00:01:30,610 --> 00:01:32,040 Can you see why? 28 00:01:32,040 --> 00:01:36,650 Net assets are your total assets minus your total liabilities, 29 00:01:36,650 --> 00:01:39,220 which is equal to the book value of your equity. 30 00:01:40,840 --> 00:01:42,900 We'll get into market value in a second. 31 00:01:42,900 --> 00:01:46,865 But what's interesting to me about book value is that it can factor in things that 32 00:01:46,865 --> 00:01:48,570 aren't tangible. 33 00:01:48,570 --> 00:01:50,240 We discussed intangible assets and 34 00:01:50,240 --> 00:01:53,070 amortization a bit earlier on in this course. 35 00:01:53,070 --> 00:01:56,957 The concept of good will, and how a company can put a value on its brand, and 36 00:01:56,957 --> 00:01:59,630 that shows up as a line item in it's balance sheet. 37 00:01:59,630 --> 00:02:04,226 Coca-Cola had over 6 billion in trademarks with indefinite lines on their 38 00:02:04,226 --> 00:02:05,959 balance sheet in 2018. 39 00:02:05,959 --> 00:02:08,915 And that's just one of their intangible assets. 40 00:02:08,915 --> 00:02:13,152 In the teachers notes, you'll find a link to Coca-Cola's 10K for 2018. 41 00:02:13,152 --> 00:02:16,666 And you can go to page 81, and read their footnote on how they account for 42 00:02:16,666 --> 00:02:18,395 intangible assets. 43 00:02:18,395 --> 00:02:23,370 Disney had over 30 billion in intangible assets on their balance sheet in 2018. 44 00:02:23,370 --> 00:02:25,620 So just think about that for a moment. 45 00:02:25,620 --> 00:02:30,040 If book value of equity is equal to total assets minus total 46 00:02:30,040 --> 00:02:35,000 liabilities in a company as billions of dollars in an intangible assets. 47 00:02:35,000 --> 00:02:40,250 That means that part of the book value of equity is based on intangibles. 48 00:02:40,250 --> 00:02:43,390 That's a very interesting topic of conversation for accounting and 49 00:02:43,390 --> 00:02:45,400 finance nerds like myself. 50 00:02:45,400 --> 00:02:49,420 Anyhow, now we're clear on what book value is, let's talk about market value. 51 00:02:50,620 --> 00:02:54,710 Market value is the price that the market is willing to pay for an asset. 52 00:02:54,710 --> 00:02:58,470 With publicly listed companies, this is a very easy to determine value 53 00:02:58,470 --> 00:03:02,290 because the real time stock price of a company is available all the time. 54 00:03:03,930 --> 00:03:08,320 >> There are lots of ways you can look up stock information online, and 55 00:03:08,320 --> 00:03:11,070 one resource is Yahoo Finance. 56 00:03:11,070 --> 00:03:15,212 >> So, let's look at the market caps of a few different well-known publicly 57 00:03:15,212 --> 00:03:16,340 listed companies. 58 00:03:17,560 --> 00:03:23,580 How about, I know their ticker is AMZN, but spelled it out anyway. 59 00:03:25,080 --> 00:03:27,510 So here have some stock information. 60 00:03:27,510 --> 00:03:32,930 We can see the price to earnings ratio, and the earnings per share. 61 00:03:32,930 --> 00:03:37,915 Different quotes and ranges for the past 52 weeks, 62 00:03:37,915 --> 00:03:43,027 but the current price is $1,819.26 a share. 63 00:03:43,027 --> 00:03:50,529 And that means the market cap of Amazon is $893 billion. 64 00:03:50,529 --> 00:03:54,952 Market cap is short for market capitalization. 65 00:03:54,952 --> 00:03:58,900 It is the value that the market places on a business. 66 00:03:58,900 --> 00:04:02,210 It is calculated by taking the current share price of a company and 67 00:04:02,210 --> 00:04:05,960 multiplying it by all the outstanding shares of that company. 68 00:04:07,610 --> 00:04:10,859 Let's look at a few other companies. 69 00:04:10,859 --> 00:04:14,310 How about Boeing, let's look at Boeing. 70 00:04:14,310 --> 00:04:16,620 There we go. 71 00:04:16,620 --> 00:04:20,983 Boeing's stock price is $372.70, and 72 00:04:20,983 --> 00:04:24,590 their market cap is $210 billion. 73 00:04:25,590 --> 00:04:31,351 What about GM, General Motors? 74 00:04:31,351 --> 00:04:36,250 $37.35 stock price, market cap, 52 billion. 75 00:04:37,800 --> 00:04:43,254 So GM is currently valued by the stock market at $52 billion, 76 00:04:43,254 --> 00:04:47,197 whereas Amazon was well over 800 billion. 77 00:04:47,197 --> 00:04:53,056 How about a newer stock, that TWLO, they just IPOd recently about, 78 00:04:53,056 --> 00:04:56,401 within the past 12 months, I think. 79 00:04:56,401 --> 00:05:00,054 And their stock price is at $135, 80 00:05:00,054 --> 00:05:04,630 and their market cap is 16.765 billion. 81 00:05:04,630 --> 00:05:06,550 Let's take a look at their one year trend has been. 82 00:05:09,295 --> 00:05:10,440 Going up. 83 00:05:10,440 --> 00:05:11,440 Good job, management. 84 00:05:12,710 --> 00:05:15,346 Okay, and how about one more. 85 00:05:15,346 --> 00:05:18,700 GE, General Electric company. 86 00:05:18,700 --> 00:05:24,831 Okay, their stock price is $10.27, and their market cap is 89.4 billion. 87 00:05:24,831 --> 00:05:28,591 Well, let's compare their market cap to their book value of equity. 88 00:05:28,591 --> 00:05:34,527 Fortunately, we can retrieve that information very easily here online. 89 00:05:34,527 --> 00:05:35,335 So. 90 00:05:37,217 --> 00:05:39,858 We have their financial statements. 91 00:05:39,858 --> 00:05:43,002 Let's look at the balance sheet for the year ending. 92 00:05:43,002 --> 00:05:45,860 We can go to quarterly information. 93 00:05:45,860 --> 00:05:51,049 The most recent quarter available is the same as the year-end data And 94 00:05:51,049 --> 00:05:54,160 here we go, we're down in the stockholders equity section. 95 00:05:54,160 --> 00:06:02,360 So the book value of the stockholder equity is $30.975 billion. 96 00:06:02,360 --> 00:06:04,200 Because all these numbers are in thousands. 97 00:06:05,350 --> 00:06:12,240 So 30.1 billion, let's call that, and go to the summary. 98 00:06:13,320 --> 00:06:15,200 And the market cap is 89. 99 00:06:15,200 --> 00:06:19,350 So, their market cap is well above their book value. 100 00:06:19,350 --> 00:06:20,910 And that's totally normal. 101 00:06:22,190 --> 00:06:24,180 So as you can see, 102 00:06:24,180 --> 00:06:29,020 the book value of a business is not always the only way to value a business. 103 00:06:29,020 --> 00:06:32,030 And is perhaps not the best way, right? 104 00:06:32,030 --> 00:06:36,040 It's easy to determine the market value of a publicly listed company. 105 00:06:36,040 --> 00:06:39,480 But this is slightly more difficult for private companies since 106 00:06:39,480 --> 00:06:44,180 the market information is not readily available and dynamic. 107 00:06:44,180 --> 00:06:47,580 Again, we're not gonna get into how investors actually conduct 108 00:06:47,580 --> 00:06:51,130 valuation exercises in any length in this course. 109 00:06:51,130 --> 00:06:54,950 But it's important for you to understand the difference between the book value and 110 00:06:54,950 --> 00:06:56,620 market value of a business.