This blog post explores why a company’s stock price remains low despite substantial assets, and the underlying market logic behind it.

Why is a company’s market value lower than its net asset value?

Any investor new to the stock market has likely wondered this at least once.
“Why doesn’t the stock price rise for a company with substantial assets and decent performance?”
Or, “Why is the stock price valued so much lower than the book value of its assets?”
This question seems simple, yet it provides a crucial clue to understanding how the stock market operates.
To put it simply, stock prices (market capitalization) are determined not by the absolute size of current assets, but by ‘how much profit those assets can generate in the future’.
Let’s examine the reasons one by one.

Why do loss-making companies have high stock prices?

At first glance, it seems counterintuitive, but it’s actually quite common for companies consistently posting losses to have high stock prices. For example, consider a tech startup listed on the US Nasdaq that records millions of dollars in losses every year. Yet, its market capitalization reaches $1 billion. Why?
The reason is simple: the market focuses more on the company’s ‘future growth potential’ than its current state.
Investors judge that the company possesses unparalleled technological capabilities, holds a competitive advantage within its industry, and has a very high probability of turning profitable in the near future.
Companies like Amazon and Tesla also recorded losses for years after their initial public offerings, but the market anticipated they would generate enormous profits in the long term—and that expectation ultimately became reality.
In other words, stock prices reflect an invisible value called ‘anticipated profits’.
And the more this anticipation fuels investor expectations, the higher the market capitalization can become relative to actual assets.

Why Market Value Falls Below Net Assets

Conversely, why do some companies have a market capitalization lower than their net assets?
This is due to the market’s ‘assessment’ that the company will be unable to generate significant profits in the future.
That is, it possesses assets, but those assets are not functioning properly, or the structure for generating profits is deemed to have collapsed.
For example, suppose a manufacturer holds assets worth $500 million, but its operating profit has been steadily declining over recent years.
As a result, the company’s market capitalization falls to around $300 million.
This is because the market has judged that “even with $500 million in assets, those assets will not generate sufficient future profits.”
Ultimately, stock prices reflect indicators of future profitability, not simply the sum of assets on the balance sheet.
In other words, even with high net assets, if there is no profit-generating capacity, the stock price will inevitably fall.

Real-world example: Value distortion in real estate companies

This phenomenon is particularly pronounced in real estate companies.
For instance, consider a Chinese listed real estate company holding $1 billion in net assets, yet its market capitalization is only $270 million.
In this case, the price-to-book ratio (PBR) is 0.27, meaning the market values each dollar of the company’s assets at only 0.27 dollars.
Why does this happen?
It’s because most of the assets held by this company are commercial real estate, and the rental yield on these assets is only around 1-2%.
In other words, while the company has substantial assets, the cash flow generated by those assets is very low, making it unattractive as an investment.
If depositing money in a bank yields 3-4% interest, there’s no reason for investors to take on risk and buy this company’s stock if the return is only around 1.5%.
As a result, the market ends up valuing the asset itself very low.

Low-profitability companies aren’t even attractive for acquisition

Let’s look at it from another angle.
Suppose a company holds $200 million in net assets but generates a mere $200,000 in annual net profit.
In this case, the return on assets (ROA) is a mere 0.1%.
Would anyone step forward to invest $200 million to acquire such a company?
Probably not. Because depositing the same $200 million in a bank would yield millions of dollars in annual returns.
Therefore, for this company to be attractive for acquisition, it realistically needs to be valued at $100 to $150 million or less.
Under this structure, the market price naturally has to be lower than the net asset value.
In other words, the size of the assets isn’t what matters; the key point is ‘how efficiently those assets are managed’.

What if the entire industry enters a decline phase?

This decline in value can expand beyond individual companies to become an issue for the entire industry.
A prime example is the real estate development industry, which once enjoyed a boom.
In the past, many real estate companies achieved high growth, recording asset returns of 15-20%.
However, entering the 2020s, profit structures deteriorated sharply due to strengthened real estate regulations, funding restrictions, and the introduction of price caps on new housing sales.
As a result, one major real estate company saw its PBR drop to 1.3 in 2021, while another fell below 1.0.
The market, recognizing the industry-wide slowdown in profitability and structural limitations, began to assess the future value of real estate assets more conservatively.
Thus, in industries that have passed their maturity phase and entered decline, stock prices tend to remain low regardless of the amount of assets held.

Why do stock prices fall even with good performance?

At this point, another question arises.

“Why are stock prices falling despite good performance?”

The answer to this question lies in ‘expectations’.
Stock prices don’t move based solely on ‘current performance’; they react to whether that performance met investors’ expectations.
For example, what happens if an IT company reports quarterly net profits of $10 million, but the market was expecting $15 million?
Even if the actual performance is decent, the stock price could fall due to disappointment that it fell short of expectations.
Conversely, even a slight beat over expectations can cause a stock price to surge sharply—this is a characteristic of the stock market.
Especially with growth stocks, expectations are often already overly priced in, meaning the stock price can fall even if the actual results aren’t bad.
Ultimately, stock prices are psychological indicators reflecting ‘future predictions,’ so they shouldn’t be judged by simple numbers alone.

Conclusion: Stock prices look to the ‘future,’ not assets

Summarizing what we’ve examined so far, the reason a company’s market capitalization is lower than its net assets is because those assets lack the potential to generate sufficient future profits.
Conversely, even without current earnings, if there is strong expectation that the company will generate massive profits in the future, the stock price can form significantly higher than the net asset value.
Assets are ultimately just ‘tools,’ and their value can completely change depending on how those tools are utilized.
As an investor, you should not just look at the size of assets or past performance, but carefully examine what kind of future trajectory the company can create.