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Book Value, Market Value, Face Value of Share - #5 MASTER INVESTOR - YouTube
Channel: Asset Yogi
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Namaskar, my name is Mukul and welcome to AssetYogi
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where we unlock the knowledge of real estate and finance.
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When you invest in the stock market you get to hear 3 values of share.
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One is the face value
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second is book value and the third is market value.
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So many people get confused, what is the meaning of which value
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and what is exactly the concept of it?
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So in this video, we will understand the concept that how
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face value, book value, and market value differs?
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How to calculate these.
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Along with that, we will also see the PB ratio that what exactly is the PB ratio?
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That we call as Price Book ratio. Price: Book value of a share.
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So what does that mean? And how it helps to estimate the right value of a stock.
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So do watch this video till the end, let's move to the blackboard.
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So let's understand book value, market value, and face value with an example.
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Suppose you want to start a company, let's say you want to place
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a shoe manufacturing unit.
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So for that first of all, you will register a private limited company.
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When you register a company, that you need to appoint directors
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and you need to put capital.
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We call that capital Equity capital, which initially the promoters put.
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And some shares are issued against the Equity capital.
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And the issued shares have some value that we call face value.
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So when you initially issue shares
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then the original value of the share that is mentioned in the certificate
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is the face value.
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And whatever amount you invest we call it Equity capital and
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the formula for that is face value X number of shares.
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So suppose you invested Rs 1 crore and set face value for 1 share to Rs 10.
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And you issued 10 lakh shares.
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So how much is your Equity capital? Rs 1 crore, that you initially invested.
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Now see and understand, Equity capital
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is minimum legal capital that you need to maintain in a business.
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This is a type of reserve.
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so the money should not go below this limit and the
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the sum above the limit is what you can give as a dividends
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to the investors.
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There is no problem if the capital dips below this if you are
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investing in your business so that is not an issue.
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But the sum above this limit, only that you can
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give as dividend to the investors and shareholders.
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There is no need for face value more than this,
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when you invest in shares then you don't need to bother much about face value.
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And let me tell you another fact, the face value does not change with time
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until the stock splits, suppose instead of 10 lakh you set 20 lakh shares
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then the value would be 5 instead of 10.
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So the face value does not change if the number of shares is the same.
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But if the number of shares increases, the face value can change.
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And as I told you earlier you don't need to bother much when investing,
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but your concept should be clear.
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So when you invest in shares then you
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need to bother more about book and market value.
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So what is book value now?
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Book value is the value of Shareholder's Equity according to Books of Accounts.
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Mean according to the balance sheet the value of Shareholder's Equity
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is the book value.
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Let me explain this with an example.
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Let's take this example, suppose in this factory
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all the assets, plant & machinery, its real estate, and cost of the building
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suppose the value of the total asset is
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That here is Rs 20 crore.
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Plant & machinery, real estate cost. cost of the building, all the fixed
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and current assets is Rs 20 crore.
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Now if we divide this Rs 20 crore then let say your Rs 15 crore
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in this is for equity.
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Mean the initial investment by the promoters, or by the investors.
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And the left amount is Rs 5 crore, let say you have a loan, that we call liabilities.
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Alright, so this Rs 20 crore split has Rs 15 crore as equity
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and Rs 5 crore liabilities.
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So now, what will be the book value?
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The book value is the shareholder's equity
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according to accounting, it is the book value.
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Now, what is the book value? This book value is of company.
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So if we want to calculate book value per share then what will be its formula?
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You will subtract liabilities from tangible assets as I did here.
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So let's take an example, how much is the tangible assets here? It's Rs 20 crore.
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You subtracted how much? Rs 5 crore is your liabilities so you subtracted that.
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divided by what is our number of outstanding shares? 10 lakh.
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So here we will divide it by 10 lakh.
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So what is the final calculation here? Rs 15 crore divided by 10 lakh
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so how much this is? So our book value came out to be Rs 150 per share.
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Now see while calculating book value one thing you need to keep in mind is
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that you need to take the value of only the tangible assets.
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I have already made a video on tangible and intangible assets in detail
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you can watch it.
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Intangible assets we take fixed and current assets
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you add both of this and in liabilities also basically
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we include both normal liabilities and current liabilities.
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so you will get the book value, this is according to the balance sheet.
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Now see we are calculating the value of shareholder's equity
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book value is shareholder's equity.
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So you can calculate this by another method too.
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The equity capital, initially you invested Rs 1 crore here
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and let's say you earned Rs 14 crore over some time
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you collected a cash reserve of Rs 14 crore.
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So here also what would you do? Total equity capital means here
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1 crore is equity capital, reserves are of Rs 14 crore this divides by 10 lakh
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So from here also your book value comes out to be Rs 150.
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So see in this way you calculate your book value.
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Now I will also share a comparison between book value and market value.
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But quickly before that let's understand market value.
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What is the market value of any share? It is simple when you look at the share price
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of any company or stock, so the price of the stock is called market value.
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Market value means any market setting a value of anything
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according to demand-supply
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or what will be its future prospects,
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the value set according to that is called market value.
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So for example, for this company, if the market value price is let say Rs 200.
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Now see here, the book value of only Rs 150 but the market value is Rs 200.
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That means people are ready to pay a premium for this,
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they are putting more value than book value,
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because they believe its prospects are much better.
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Now, why prospects could be better?
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Now see, let me first clarify what we talked about,
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this is the market value of the share.
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So if we calculate the market value of the company here,
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so how much would it be? You will multiply Rs 200 with 10 lakh.
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So your market value comes out to be Rs 20 crore.
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So how much was our book value? Book value here was Rs 15 crore.
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So this premium of +5 crore, why pay for that?
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Let's quickly see that, the comparison between book value and market value.
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So book value as I said, according to the balance sheet
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the calculated value of a company or share
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that come out according to accounting.
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And book value in a way is the residual value,
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God forbids that if in case all the assets of a company need to be sold
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so how much money will we get? It is simply that.
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If you divide that to all shareholders then you will get the book value.
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Now, what is market value?
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Market value is the perception of the market
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that how is the future of this company?
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What are the things that the future may depend upon?
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It can also depend on intangible assets, we included tangible value in book value
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but there are intangible assets too.
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There is a brand value, if it has any technology,
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it has copyrights, patents, and trademarks.
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Suppose the strategy of the company is very good than the competitors
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so people will account for that too in the market value.
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Good leadership and good management,
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the prospects of the industry are is very high
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suppose the company is the market leader in their industry.
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So for this reason people pay a premium in market value.
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Market value, which we call is a perception of the market.
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Book value according to accounting is the value of one share, very simple.
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Now see there is also a comparison of book value and market value
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that we call as PB ratio.
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PB mean price per share divided by book value per share you do.
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So this means if you divide market value with book value you will get a P/B ratio.
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This means how many folds is the market value of the book value.
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What does that mean? Let's try to understand it in detail.
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So suppose like oil and manufacturing companies these are very asset-heavy
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industry. There are a lot of tangible assets, plant and machinery are a lot
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there are a lot of buildings and lands
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for this reason, the book value for these gets very high.
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So when book value gets high their PB value decreases.
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While on the other hand if we talk about technology companies
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P/B ratio is higher because book value for tech companies is low
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because their employees are their asset or some technology is their asset.
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So their intangible assets are a lot compared to low tangible assets
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so their book value is very low usually.
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And for this reason, their P/B ratio gets very high.
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So when you compare you can compare an oil company to another oil company
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and you can't compare it with a technology company.
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So for this reason,
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if you want to use the P/B ratio you can see the historical P/B ratio
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that its price and book ratio was how historically?
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Check for the last 4 to 5 years.
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Check the value of the competitors, compare oil company to oil company
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and manufacturing company to manufacturing company.
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So you can estimate the right value of the stock.
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Now I will make a detailed video on the PB ratio in the future.
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But I am sure you much have understood the comparison of
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market value, book value, and face value a little bit.
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Now let me quickly show you a real example that actually
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let say we see the stock of Infosys or Reliance
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and we will also see their PB ratios
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and how can we calculate their face value, book value, and market value?
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Let's quickly analyze Infosys
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I have opened this website of India InfoLine
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And I have opened the balance sheet of Infosys
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You can browse through other websites as well like money control equity master
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and many more sites where you can find the finances of many listed companies
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Now, we'll go under the balance sheet tab to find the phase value and book value
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now here we are given the equity capital
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equity capital is 1088 crores, all figures are in crores.
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so, if the equity capital is 1088 crores so we can calculate the Face Value
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Now, We'll divide this value by no. of outstanding shares
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So, currently, the total number of outstanding shares of Infosys is 218 crore.
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you can get the number of outstanding shares also from these websites,
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I had already checked them earlier
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so now if we divide this value with 218 crore
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so the value of one share will be 5 Rupees.
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So, In this way, you can calculate the Face Value.
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Now, If you want to calculate Book Value then you'll require shareholder's equity
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So, the Net Worth is the ShareHolder's Equity if we talk in Corporate Terminology
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Now, you have to subtract Preference Value from this, in this case, it's Zero.
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To calculate the book value of a common share
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you can subtract the Preference Value.
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and add the reserves in the equity capital
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so here the preference capital is already zero, so the net worth
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will be divided by the total no. of outstanding shares i.e.218 crores
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so the book value of 1 share will be 297 Rupees
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So as you can see there is no comparison between Face Value and Book Value
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because a face value is kind of a never-changing value
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we need not bother much about that in investing
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but book value we understood is 297
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So now let's try to compare it with the market price
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I'll show you the current market price of Infosys
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So, this is the market price as of now - 2 July
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So, the current market price as of now was 1332.
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So now we'll try to compare both these things.
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So, 1332 is the Market Value
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Now, we have seen all three - Face Value, Book Value, and Market Value
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Now, we'll try to compare these
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Here you will get the historical data as well as peer comparison
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Try to understand peer comparison here
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Peer Comparison is done between the similar type of people
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between the similar type of players in the industry.
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You can't compare Infosys with Reliance
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Now, here Comparison of Infosys and TCS is shown
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as well as with HCL and WIPRO
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Here the book value is given for all four
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and here the Current Market price is stated
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So, now if you take out the P/B ratio
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So you'll divide 1851 by 198
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Now, if you see the P/B of TCS is rising to the apex
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So now if you divide 1851 by 200 so the value is 9 times the book value
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Now, as I have already told you earlier that
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the book value is quite low in technology companies
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And due to that P/B ratio is quite high.
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In the case of TCS, P/B is almost 9 times
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Now, If we talk about Infosys the Book Value is almost 300
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and the current market price is 1332
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So here it's almost 4 times
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If we talk about HCL so here also it's roughly 4.5 times
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Now finally, if we talk about Wipro so the book value is 100,
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so here it is approximately 3 times
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I have taken only the approximate figures here
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So you can see that price of TCS is a little bit over prices
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in comparison to book value.
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So this way you can compare peers.
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Similarly, like this, if we want to compare some heavy industry.
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Let's say we do the comparison of Reliance.
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I have also opened the stock of Reliance here.
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So see there is not a big difference between book value & current market price
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it is less than almost double.
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This is going at around 1.8, 1.9 P/B here.
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And basically for Indian Oil company (IOC)
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booked value is Rs 114 and the current market price is just 154
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so this is going only at around 1.2.
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So you can see these asset-heavy industry , their price
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and book value ratio is very low.
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In comparison to tech companies that are asset-light industry
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So like this, you can compare when you go to buy any stock
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so you can see which stock
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is more in comparison to book value.
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Now, I will make a detailed video on the P/B ratio
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where we will see all the comparison
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how can you value the sock and also
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what type of factors are there.
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But I think in this video, face value
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book value and market value concept is clear.
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I tried to cover all the major points in this video.
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Still, if some point was missing or want to add
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so you can comment down below.
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And don't forget to like and share this video.
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I try to share a detailed video of finance with you
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I share this type of financial video on this channel.
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press the bell icon so that you get all the notifications of the latest videos.
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So we'll meet in the next informative video.
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Till then keep learning, keep earning, and as always stay happy.
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