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When the average price to book value is more than one, investors are willing to pay more than their book value. In general, stocks of good performing companies are traded at their book value.
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Following our specilized colleagues replies and answers.
Carrying value is a term that usually refers to accounting for a business. The carrying amount of an enterprise is equal to its net worth, which is the sum of the value of all the assets of the enterprise to which its liabilities are subtracted. It allows potential investors to know the value of a company once its assets sold and all its debts paid.The term book value can also be used in the stock market world. The book value of a share refers to the intrinsic value or liquidation of a share. It is calculated by dividing the book value of the company as it appears in its balance sheet by the number of shares that make up its capital. Often very different from the market value, the book value of a stock is not very relevant for an investor who wants to buy securities.Accounting value: the calculationCarrying value of the business = assets of the enterprise - liabilities of the enterpriseCarrying value per share = book value of the company / number of shares
Market capitalization represents the value of the business at a given moment. The value estimated by investors. The only value that investors have decided to set to buy or sell their securities. The market capitalization can not be higher or lower than the will of the market as a whole. So, if investors estimate that a company is worth 1 billion euros, it is that the company is worth one billion. We can even say that this valuation is higher than the reality, because the mere listing of a company mechanically leads to a better valuation. High liquidity is paid. Thus, investors will be more likely to shell out more if they know that in case of a problem, or even if the desire takes them, they can quickly sell their securities. A house in the countryside in a small village, whatever its intrinsic qualities, will always be worth less than the simple value of the land. Indeed, the number of potential investors being limited in the sector, sellers will have no choice but to lower the price. Liquidity is paid.Only investors can determine the valuation of a company. That employees believe that society is worth more. Why not. But they will not have sufficient funds to acquire the business at this price. At the same time, if a buyer makes an outrageously lower bid than the expected price, it will become the only valid one if the seller accepts it. In other words, the market capitalization is the only value of the company at a time t. It represents at the same time the assets of the company, its trustworthiness towards investors and the risk taking that they consider. Indeed, if investors believe that the risk of placing their money on a particular company is high, they will require a higher profitability. Why invest in a risky company, if the hopes of winning are identical to Livret A? This desired profitability can result in strong dividends, but also, and most often, in a rise in stock prices. If the company's profile is too risky, investors will position themselves at a very low price level in order to hope for a higher price. Market capitalization will be low but relative to high risk
