In a world of constant development, knowledge means benefits. Businesses are growing rapidly. New companies are being established to provide you with a better and safer environment or life. Ongoing developments demand more knowledge or information.
We need good professional knowledge even without formal education. Any company owner not only needs enough capital but also knowledge of each and every aspect of a business.
Face value, book value, and market value - these are important terms in the world of business. The terms seem to be simple, but there can be confusion about what they individually mean. Thus, it is vital to check the face value vs book value comparison.
Concept of Face Value
The first concept we start with is face value. It is also known as a nominal value. So, it is the par value of the common stock of a company in the balance sheet. As the name suggests, it is what is to the face. So, it can be the actual stock value but not the actual market value.
Being the original cost of shares, it is listed in the certificate. It is represented by the value of shares the company raises from the market. The original value is of utmost importance for a number of items. It helps in calculating the number of important factors. But for its own calculation, we need equity share capital and the number of shares that are outstanding.
Built during the start of the company, it mostly remains the same. There are a few important purposes of face value.
- Helps calculate factors like market value, returns, interest on shares, discounts, etc.
- Know and understand bond prices.
- Used for smooth trading and investment purposes.
- Used to know the value of shares of stock at the start of a company.
Now while we understand the importance of face value, the calculation becomes an important part. Along with calculation, we need to know the face value vs market value debate. This helps us learn why it is important.
Face Value = Company’s Net Worth/No. of Shares Issued
The net worth can also be calculated by dividing your assets and liabilities. You need to remember that this value is calculated at the start of the company. Hence, its error-free calculation is important to move further with others.
The Concept of Book Value
Now, as the name suggests, it is the value in the books. It represents the net worth of the company. A company’s net worth accounts for what it holds in the market. It represents the ongoing business with the value in the financial statements. Because of this reason, we can experience annual fluctuations here.
In layman's words, this value is the free equity of the company. The value that we get after selling all assets and finishing our liabilities. Annual performance is reported here. Once reported, we need to understand the adjustments. Accounting plays a key role here. Hence, when we understand the reports, we need to analyse them properly.
Talking about shares, it is the value of the share in the books. Again we are looking at the face-value vs book value comparison. This is also an important value to be known for in-depth, functioning knowledge. Here only tangible assets are taken into consideration. So, it might not be a very reliable value at times. A few important uses include:
- Helps to understand and make a fair deal investment strategy.
- Know the nature and representation of all assets.
- Calculate price to book value ratio used for investment decisions.
- Get an insight into how the annual working is affected and analyse adjustments.
- Know the undervaluing or overvaluation of stocks.
Now we need to know how to calculate the book value. Here, there can be a few important but small ways of calculation.
- Book value per share = Total Assets-Total Liabilities or Equity Share Capital/Total Number of Issued Shares
- Book Value per share = Face Value + Reserve per Share or Total Assets - (Total Liabilities-Current Liabilities)
Reserve and Face Value are used here. The first one grows with time as the addition of profit takes place.
Differences and Relationship
We have now gone through all relevant terminologies. The book value uses face value. We do not check the face value for regular changes. The book value gives us an annual insight relating to financial statements. This builds up some differences but also some relationships as per calculations.
They hold a more theoretical value. Hence, it may sometimes not really show the real or true values. If we want to see some key differences, we can note them down according to the calculation, the time of the calculation, and the purpose of their usage.
Here we have given proper insight into the working of a company. In this developing market, competition is at its peak. Each company is trying to establish a bigger foot in the market. The share market undergoes daily fluctuations. This leads to a lot of confusion and no real knowledge of some current important aspects. But, whenever there is a big firm working with many shares trading all over the market, knowledge is a key factor. Even people who invest in the share market need to be well-versed with such terms.
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Q. What is par value?
Ans. Par value is the same as face value. It is also known as the nominal value, the state value at the time of issuing. It is just more common with bonds. With bonds, this is the bond that the issuer agrees to pay when the bond matures.
Q. What is market value?
Ans. This is another important term. It refers to the competitive world and the value that an asset will fetch. It takes into account the current stock price of the shares, which are in the prices of trading. We can also term it the value given by an investment community to a business or equity. This value refers to the market capitalisation of a company’s work.
Q. What are the comparative points between book value and market value?
Ans. As mentioned earlier, book value is the value in financial books. There are rules to record it. Book value helps understand the financial working of the company. All liabilities are removed from the assets to get this value. This value is the end for stakeholders. When all assets are sold and liabilities are paid off, we get this value.
When it comes to market value, it is not such a theoretical value. It is a more flexible term. We calculate it by multiplying the current stock price with the number of shares outstanding that we are trading in the market. It is the value at which an asset of the company would trade in the market.
Q. What kind of book value is better?
Ans. Book value and market value are important terms to understand the working of a company. It helps understand the annual financial working and current asset marketing. When book value is more than the market value, we refer to it as an undervalued stock. A lower book value suggests an overvalued stock. Thus, we need to create balance.
Q. What does a negative book value mean?
Ans. When a book value comes negative, it means liabilities are higher than the assets of the company. This is not a good state for the company and is known as balance sheet insolvency. As the book value gives us insight into the company's working, this annual report can help us understand adjustments. It might be possible that we need to analyse, and take help from the accounting team.