What Is Book Value?
The book value of a company can be defined as the total asset of a company minus the total liabilities of that company. In a simple sense, if a company goes broke and have to sell all its asset and pay the liabilities, the left amount will be its book value.
Book value can be considered as the net asset value of the company, which can be calculated as the total asset minus the intangible assets (Like patents, logo, or other copyright items).
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Formula and Calculation of Book Value
To calculate the book value of a company, you have to find out the total asset of the company and total liabilities on the company. Both of the figures can be collected from the company’s balance sheet.
The formula to calculate the book value is total assets minus total liabilities.
Book Value = Total Assets – Total Liabilities
Suppose, A company has total assets of $500 million and liabilities of $350 million, what will be the company’s book value?
As you book value = Total assets – Total Liabilities
So Book Value = $500 Millions – $350 Millions = $150 Millions
Calculation of book value is very simple and most of the listed company’s book values are available online on many websites.
Importance of Book Value
Book value is an important factor, that represents the value of the company if it liquidates itself. Using book value investors can calculate the price to book value ratio (P/B Ratio).
Price to book value ratio (P/B Ratio) is a fundamental analysis ratio, that is being used to compare two different companies from same the industry when they follow a similar accounting method for their asset valuation. P/B ratio may not be as effective in comparing companies from different industries.
Book Value Vs Market Value
The book value of a stock represents the net value of the company, whereas the market value of the company represents the market capitalization of the company. A company with good fundamentals and growth usually has a market valuation of 5 to 10 times the book value. Both market value and book value can not justify a share price, that varies with different parameters.
Limitation of Book Value
There is no way to know the book value of a company without its balance sheet, that is released quarterly or annually. Without the proper knowledge of assets, liabilities, or the adjusted items, calculation of book value is quite hard.
The book value of a company represents the intrinsic worth of a company. It is also an important tool for investors to know if a company is undervalued or overvalued to buy or sell a share.