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Explaining the Difference in Book Value and Market Capitalisation

Categories: The Value Of Books

Marks and Spencer Group plc is a British retailer of clothing, food and home products with 600 stores in the UK and 285 abroad, 75000 staff and as many as 21 million shoppers each week. It’s known for their high social, ethical and environmental standards and it’s associated with quality, good service, innovation and trust. Those standards have attracted and kept a loyal customer base over the years, which in turn has built a strong market position.

With the dramatic changes in the global economy across the world, coupled with the worst situation for the retail industry since early ’90, has caused M&S’s shares to fall by 63% over the past 12 months and profits to drop from ? 550 million to ? 307 million.

Despite that, the market capitalisation is still strong at ? 4,103. 31m. The book value in March 2008 was ? 1,964. 0m (It dropped further to 1,794. 1m up to September 2008 mainly due to loss of receivables, as well as a decrease in retirement benefit assets and an increase in borrowings and tax).

The difference between the market capitalisation and book value is caused by various market factors that influence share price but don’t affect net assets value. Market capitalisation is a market estimate of a company’s value, based on perceived future prospects, economic and monetary conditions. That’s why this value will be most likely higher than the book value, which can only express monetary issues. Therefore the book value doesn’t reflect customer loyalty, value of a brand name or research and development.

Balance sheet doesn’t include information about future plans and strategies which hugely influence market value.

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The recent drop in M;S’s share price reflects current economic downturn and challenges M;S is facing. The financial instability has introduced new competitors who offer “aggressive pricing”- Primark and Aldi- and for many M;S’s customers value is now the key in choices they make. Some events, which can’t be measured in monetary units, can also influence the market value of the firm without being recognised on the balance sheet.

The news that M;S is pressing on in international markets, with plans to open 10-15 stores in India over the next two years, as well as making inroads into China – by opening their first store in Shanghai in October – has attracted new investors and driven up the market price. The balance sheet however remains unchanged and the gap between market cap and book value deepens. A similar effect can be caused by the introduction of new promotions such as “Dine in for 10”, price realingnment or replacing the head of their food department.

Another major event that kept share prices up is seen to be the expansion into new domestic markets; M;S’s customers are now able to buy gas and electricity in stores or online and can also potentially receive rewards – in the form of M;S vouchers – for signing up to new deals, renewing existing contracts and cutting their power consumption. We could also observe the movement in share prices when M;S has annouced the appointment of Jan du Plessis as a Non-Executive Director. Again, it doesn’t have any impact on assets and liabilities but reflects in company’s market value.

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Explaining the Difference in Book Value and Market Capitalisation. (2018, Sep 11). Retrieved from http://studymoose.com/explaining-the-difference-in-book-value-and-market-capitalisation-essay

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