Lesson 5 of 7 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Perceived value, investor and issuer actions, and value ranges
- Book value, market value, ROE and the cost of equityVideo lesson
- Book value of equity: what it measures and how it misleads
- Market capitalisation, price-to-book and enterprise value
- Absolute valuation: present value and asset-based models
- Relative valuation and reconciling several models
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 5 of 7 · 14 min
Market capitalisation, price-to-book and enterprise value
Market capitalisation prices shareholders' claim on future cash flows and changes daily; comparing it with book value shows excess value or a shortfall, while enterprise value prices the whole firm net of cash and so compares companies with different leverage.
In short
- Market capitalisation = price × shares outstanding; it is forward-looking and changes daily, while book value updates only with financial statements.
- A share repurchase cuts book equity by the amount spent at once; its effect on market value depends on how investors read the signal, and the lower share count is disclosed only later.
- Market cap above book value shows excess value; below book value, a shortfall, which may mean undervaluation or poor assets and management.
- P/B comparisons need peers with similar leverage and no big book value distortions.
- Enterprise value = market value of debt + market cap + preferred − cash and short-term investments: the buyer's view, less sensitive to capital structure.
- EVs in different currencies cannot be compared directly; EV multiples (EV/Revenue, EV/EBITDA) can.
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