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Book value refers to the total amount a company would be worth if it liquidated
its assets and paid back all its liabilities. This is the amount that the company’s
creditors and investors can expect to receive if the company is liquidated.
Calculation:
For example, if Company XYZ has total assets of $100 million and total
liabilities of $80 million, the book value of the company is $20 million. In a
broad sense, this means that if the company sold off its assets and paid down its
liabilities, the equity value or net worth of the business would be $20 million.
One must note that if the company has a component of minority interest, that
value must be further reduced to arrive at the correct book value. Minority
interests the ownership of less than 50 percent of a subsidiary's equity by an
investor or a company other than the parent company.
For instance, retail giant Walmart Inc. (WMT) had total assets of $204.52
billion and total liabilities of $123.7 billion for the fiscal year ending January
2018, which gives its net worth as $80.82 billion. Additionally, the company
had accumulated minority interest of $2.95 billion, which when reduced gives
the net book value or shareholder’s equity as $77.87 billion for Walmart during
the given period.
MARKET VALUE
The market value represents the value of a company according to the stock
market.
OUTSTANDING SHARES
Shares outstanding refer to a company's stock currently held by all its
shareholders, including share blocks held by institutional investors and
restricted shares owned by the company’s officers and insiders.
In a non-financial company, when companies own fixed asset (say factories and
equipments etc.) and let’s say they become bankrupt, the fixed assets may be
liquidated at only a significant discount to prices compared to when it was bought.
This is not the case with banks because cash or investments or the loan value which
are the primary assets of banks are still the same. For a financial institution the Book
Value (“B”) is supposed to (but is not always) be close to what one would get if you
liquidate the business. Hence P/B is important.