Explaining the Difference in Book Value and Market Capitalisation for M&S

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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.

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...
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