Book value, market value, ROE and the cost of equity

In short

• Book value of equity = total assets − total liabilities; it grows when the company retains net income. Management affects it directly, market value only indirectly.
• Market value (market cap = price × shares) reflects investors' expectations of the amount, timing and uncertainty of future cash flows; it rarely equals book value.
• ROE = net income available to common shareholders ÷ average (or beginning) book equity. Use one version consistently.
• A rising ROE is not always good: it can come from net income falling slower than equity, or from debt-financed buybacks that add leverage.
• Price-to-book = market price per share ÷ book value per share; higher means investors see more future growth opportunities. Compare within an industry.
• The cost of equity is the minimum expected return a company must offer to sell and support its shares; it is hard to estimate and is used as a proxy for investors' minimum required return.