What Is a Company Actually Worth? Book Value vs Market Cap for Beginners

A note on authorship: The research, analysis, and opinions in this article are the author's own. Claude (Anthropic's AI) assisted with drafting and editing the prose.

This is Part 2 of our Stock Market Basics series. In Part 1, you and four friends opened a coffee shop, split it into 100 shares, and watched those shares rise in value. We said the shop became "worth $100,000". But worth according to what? And why would anyone pay more than that for it?

That's what this article answers. By the end, you'll understand the three numbers behind every share price, and why the price of a stock is almost always different from what the company owns.

Step 1: What does the company own, and what does it owe?

Let's return to the coffee shop, one year after opening. Everything the business owns is called its assets. Everything it owes to other people is called its liabilities.

During the year, the shop took out a $30,000 bank loan to buy a second espresso machine. Here's the full picture:

A small simplification: in real accounts, equipment and fit-out don't stay at the price you paid. They wear out, so each year the accounts knock a slice off their value. That's called depreciation. We've kept the round numbers here to keep the example easy to follow.

That last line has a name: book value. It's what would be left for the owners if the shop sold everything it has and paid back everything it owes. It's called "book" value because it comes straight from the company's accounting books.

In other words, each share is backed by $1,000 of real stuff.

One thing that is not on this list: revenue. It's a common mix-up, so it's worth saying clearly. Revenue is money flowing through the business during the year, and most of it flows straight back out again to pay for beans, wages and rent. It isn't something the company owns. Only the bit that's left over after costs, the profit, adds to what the company owns.

Step 2: How much does the company earn?

Book value tells you what the business has. But nobody buys a coffee shop to own espresso machines. They buy it for the money it makes.

Let's count it in units, the same way a factory would. Over the year, the shop sold 20,000 cups of coffee at $5 each:

Profit is also called earnings. Profit per share is called earnings per share, or EPS. You'll see "EPS" on nearly every stock website.

Notice how simple the chain is: units sold × price = revenue, and revenue − costs = profit. Every company in the world, from a coffee shop to a car maker, works this way.

Step 3: What will someone actually pay?

Now a stranger walks in. They love the shop, they've seen the queue out the door every morning, and they offer to buy shares at $2,000 each, double the book value.

If someone is willing to pay $2,000 a share, then the market is saying the whole shop is worth $2,000 × 100 shares = $200,000. That figure is the market capitalisation, or market cap, which you met at the end of Part 1.

So we now have two different answers to "what is the coffee shop worth?":

Why would anyone pay $100,000 more than everything the shop owns?

Why the price is more than the stuff

Because the buyer isn't really buying espresso machines. They're buying the future profits.

Think about it from the buyer's side. Second-hand espresso machines and chairs are easy to find. What's hard to find is a shop that already has a great location, a loyal crowd of regulars, staff who know what they're doing, and $20,000 of profit coming in every year. None of those things appear on the list of assets above, but they're exactly what makes the shop valuable.

And the buyer may expect those profits to grow. Suppose the landlord has offered the shop the empty space next door, and the owners plan to open a second counter there next year. Here's how the $200,000 price looks under two different views of the future:

If the buyer believes the growth story, $200,000 looks quite reasonable. If they don't, it looks expensive. The gap between book value and market cap is the price of the buyer's expectations.

This is the single most important idea in this article. A share price isn't a measurement of what a company has. It's what investors are willing to pay for what they think the company will earn. And because those expectations change every day with news, results and mood, the price changes every day too, even when the espresso machines haven't changed at all.

Two numbers that compare price with reality

Investors use two simple ratios to see how big that gap is.

Price-to-book (P/B)

P/B = share price ÷ book value per share. For the coffee shop: $2,000 ÷ $1,000 = 2. Buyers are paying $2 for every $1 of stuff the shop owns.

Price-to-earnings (P/E)

P/E = share price ÷ earnings per share. For the coffee shop: $2,000 ÷ $200 = 10. Buyers are paying $10 for every $1 of profit the shop makes in a year. That's the same "10 years to earn it back" from the table above, if profit never grows.

A high P/E or P/B usually means investors expect strong growth, or think the business is unusually safe. A low one usually means they expect slow growth, or see risks. Neither is automatically good or bad. It tells you what the market is expecting, and your job as an investor is to decide whether those expectations are realistic.

Real companies: Toyota vs Ferrari

Let's apply all of this to two real companies that do the same basic thing: build and sell cars. Toyota is the world's biggest car maker. Ferrari builds a small number of very expensive sports cars.

Figures from each company's latest full financial year (Toyota: year to 31 March 2026; Ferrari: calendar 2025), converted to US dollars at exchange rates on 17 October 2026 (¥158 and €0.89 per US dollar). Market caps as at 17 October 2026. Revenue per car is approximate: both companies also earn money from other things, such as car loans (Toyota) and sponsorship and racing (Ferrari). *Toyota's owns-minus-owes comes to about $260 billion; roughly $7 billion of that belongs to outside partners in some Toyota subsidiaries, leaving $253 billion for Toyota's own shareholders.

Look at what this table says.

Toyota sells about 700 times as many cars as Ferrari, and makes about 13 times as much profit. Yet the stock market values the whole of Toyota at only about 3 times Ferrari.

Toyota's market cap is actually below its book value. Investors are paying about 90 cents for every dollar of factories, cash and cars Toyota owns. In coffee-shop terms, it's as if the stranger offered $900 a share for a shop with $1,000 of stuff per share in it.

Ferrari's market cap is about 16 times its book value. Almost everything investors pay for Ferrari is for things that aren't on the list of assets: the brand, the waiting list, and the ability to charge more every year.

Why the market sees them so differently

It comes back to the same question the coffee shop buyer asked: what will the profits look like in future, and how sure can I be?

• Profit per car. Ferrari keeps about $132,000 of profit from every car it sells. Toyota keeps about $2,500. Toyota has to sell an enormous number of cars, in a fiercely competitive market, to earn its profit.
• How steady the profit is. Toyota's profit fell by about a fifth this year, mostly because of US import tariffs. Mass-market car sales rise and fall with the economy. Ferrari has customers on a waiting list for years, so it decides how many cars to build, and when.
• How much money it needs to keep going. Toyota has to keep pouring huge sums into factories and new technology just to stay competitive. Ferrari builds far fewer cars and can raise its prices without losing buyers.

None of this means one is a better investment than the other. A low P/B or P/E can mean the market is being too gloomy, and a high one can mean it is being too hopeful. What the numbers do tell you is what investors are currently expecting from each company. Deciding whether those expectations are right is where real investing begins.

So what's the "exact formula" for a share price?

Here's the honest answer: there isn't one. The share price is simply whatever a buyer and a seller agree on at that moment. The formulas in this article (book value, EPS, market cap, P/B, P/E) describe the price and compare it with the business. They don't produce it.

But there is a formula for what a business is worth to its owner, and it follows directly from the coffee-shop buyer's thinking:

That figure is called intrinsic value, and the most common way to calculate it is called a discounted cash flow, or DCF. When the share price is below a company's intrinsic value, the company may be undervalued; when it's above, it may be overvalued. That's exactly what we'll build, step by step, in Part 3.

Three things to remember

1. Book value is what a company has. What it owns minus what it owes. It's the floor-level, "sell everything" view of a business.
2. Market cap is what investors will pay. Share price × number of shares. It's based on what people expect the company to earn in future, not just what it owns today.
3. The gap is expectations. P/B and P/E show you how big that gap is. A big gap means investors expect a lot. Your job is to ask whether they're right.

What's next

This is Part 2 of our Stock Market Basics series. In Part 3, we'll take the coffee shop's future profits and turn them into a single "what is it really worth?" number, using the same discounted cash flow method professional analysts use, explained with round numbers. We'll also see why profit isn't quite the same as the cash an owner can actually take out, and why that matters so much for a business like Toyota that has to keep reinvesting in factories.

Missed the start of the series? Read Part 1: Basics of Stock Investing.