CA stock may trade below its book value for several reasons

C.A stock may trade below its book value for several reasons. List some of these factors D.Pick a company from Saudi Stock Market that its stocks has been traded below its book value. Name this company? Why it wast stocks trading below their book value a good bet? Explain?

Solution

C. Following are the reasons for a stock to trade below it\'s book value:

1. Demand for the stock in the market is less than the supply of the stock. Stock market is a function of demand and supply of shares. If stocks are readily available for sale in the market but their demand is not in par with the supply then the stock price will fall and can even fall below book value.

2. If the Company is expected to deliver very poor financial performance due to lack of demand for products or rise in expenses putting pressure on margins, management quality or any other specific reason driving down the profitability, the perception of investors would drastically change and drive down the market value below the book value of the company.

3. If a company is expected to liquidate in near future(due to unavoidable or avoidable reasons), then the price of the stocks may fall below the book value and will trade at such low value in market.

4. Book value is the accounting value of a firm and is the total value of the company’s assets that shareholders would theoretically receive if a company were to liquidate. However, market value is the current market price of the total stocks available to trade. Both the terms are different from each other. Book value is the basis for the investors to decide about the quality of the stock but the same is not fundamental principal for judging the stock.