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What is the first thing that comes to
mind when you think of the word value?

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Value is a fascinating topic.

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For a lot of people, when they hear
the word value, they think of price.

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Or how much one values a friend, or
perhaps it's a motto to live by.

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That's all perfectly fine.

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But when it comes to business and
specifically finance and accounting,

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value has some concrete meanings.

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In this video, I want to explain
the difference between book value and

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market value.

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Earlier in the course, we've touched
on the concept of book value.

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This is the dollar figure associated
with particular line items

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on the balance sheet.

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If someone asks what the book value
of your current liabilities is,

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then you would go to the balance sheet and
look for

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the dollar figure on
the current liabilities line.

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Usually in everyday situations,
people wanna ask that.

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They'll just ask you what
your current liabilities are?

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But that is technically a book value.

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It's more common for

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someone to ask about book value in
the context of your overall business.

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What's the book value of the business?

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To answer that,
you'd go to the balance sheet and

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look at the number in
the total equity line.

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And that's the book value of the business.

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Some people might ask what is essentially
the same question in a different way

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by asking, what are your net assets?

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Can you see why?

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Net assets are your total assets
minus your total liabilities,

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which is equal to the book
value of your equity.

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We'll get into market value in a second.

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But what's interesting to me about book
value is that it can factor in things that

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aren't tangible.

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We discussed intangible assets and

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amortization a bit earlier
on in this course.

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The concept of good will, and how a
company can put a value on its brand, and

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that shows up as a line
item in it's balance sheet.

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Coca-Cola had over 6 billion in
trademarks with indefinite lines on their

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balance sheet in 2018.

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And that's just one of
their intangible assets.

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In the teachers notes, you'll find
a link to Coca-Cola's 10K for 2018.

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And you can go to page 81, and read
their footnote on how they account for

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intangible assets.

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Disney had over 30 billion in intangible
assets on their balance sheet in 2018.

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So just think about that for a moment.

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If book value of equity is equal
to total assets minus total

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liabilities in a company as billions
of dollars in an intangible assets.

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That means that part of the book value
of equity is based on intangibles.

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That's a very interesting topic of
conversation for accounting and

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finance nerds like myself.

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Anyhow, now we're clear on what book
value is, let's talk about market value.

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Market value is the price that the market
is willing to pay for an asset.

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With publicly listed companies,
this is a very easy to determine value

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because the real time stock price of
a company is available all the time.

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>> There are lots of ways you can
look up stock information online, and

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one resource is Yahoo Finance.

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>> So, let's look at the market caps
of a few different well-known publicly

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listed companies.

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How about, I know their ticker is AMZN,
but spelled it out anyway.

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So here have some stock information.

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We can see the price to earnings ratio,
and the earnings per share.

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Different quotes and
ranges for the past 52 weeks,

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but the current price
is $1,819.26 a share.

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And that means the market cap
of Amazon is $893 billion.

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Market cap is short for
market capitalization.

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It is the value that the market
places on a business.

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It is calculated by taking the current
share price of a company and

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multiplying it by all the outstanding
shares of that company.

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Let's look at a few other companies.

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How about Boeing, let's look at Boeing.

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There we go.

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Boeing's stock price is $372.70, and

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their market cap is $210 billion.

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What about GM, General Motors?

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$37.35 stock price,
market cap, 52 billion.

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So GM is currently valued by
the stock market at $52 billion,

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whereas Amazon was well over 800 billion.

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How about a newer stock, that TWLO,
they just IPOd recently about,

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within the past 12 months, I think.

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And their stock price is at $135,

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and their market cap is 16.765 billion.

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Let's take a look at their
one year trend has been.

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Going up.

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Good job, management.

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Okay, and how about one more.

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GE, General Electric company.

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Okay, their stock price is $10.27,
and their market cap is 89.4 billion.

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Well, let's compare their market
cap to their book value of equity.

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Fortunately, we can retrieve that
information very easily here online.

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So.

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We have their financial statements.

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Let's look at the balance sheet for
the year ending.

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We can go to quarterly information.

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The most recent quarter available is
the same as the year-end data And

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here we go, we're down in
the stockholders equity section.

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So the book value of the stockholder
equity is $30.975 billion.

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Because all these numbers
are in thousands.

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So 30.1 billion, let's call that,
and go to the summary.

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And the market cap is 89.

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So, their market cap is well
above their book value.

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And that's totally normal.

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So as you can see,

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the book value of a business is not
always the only way to value a business.

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And is perhaps not the best way, right?

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It's easy to determine the market
value of a publicly listed company.

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But this is slightly more difficult for
private companies since

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the market information is not
readily available and dynamic.

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Again, we're not gonna get into
how investors actually conduct

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valuation exercises in any
length in this course.

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But it's important for you to understand
the difference between the book value and

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market value of a business.