- A company’s book value is the total value of all of its assets minus all of its liabilities.
- Investors compare a company’s book value to its share price to judge whether stocks are undervalued or overvalued.
- Book value works best for hard goods companies versus service providers or companies with intangible assets.
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When researching which stocks to buy, investors often need to pay close attention to companies’ financials. One of the big things they look at is book value.
Book value is a calculation that aims to determine the true, full value of a company based on its assets. It’s basically the liquidation value – the amount the company would be worth if it were liquidated.
Investors use book value to assess whether a company’s stock is over- or undervalued.
Let’s dig deeper into book value, how it is calculated, and what it means.
What is book value?
Book value actually has two interrelated meanings. In the world of accounting, book value refers to the value of a specific asset on a company’s balance sheet – such as property or equipment. The book value of the asset is its cost less depreciation (the value decreases as it ages or is used up). It is mainly used for tax purposes.
In the investment / finance world, the meaning of book value is an expanded, extrapolated version of the first definition. It is the total value of all of the company’s assets – the value of all goods, real estate, money, and other things it owns – minus its liabilities – its expenses and debts. Usually, the value of intangible assets such as intellectual property or patents is also deducted.
This sum is intended to measure the actual “value” of a company. It is the amount that theoretically represents the company’s liquidation value. If the company went under or was dissolved and sold, that book value would be used to determine what each shareholder would get – roughly the present value of their individual shares.
How to calculate book value and book value per share
Book value is not often included on a company’s stock market listings or online profile. To find its book value, you need to look at its financial statements and all of the assets and liabilities listed on its balance sheets. Add up all assets, subtract all liabilities and the result is book value.
What is the book value per share?
While you need to calculate book value yourself, most online stock quotes include a related metric that is also useful for investors: book value per share (BVPS). Book value per share is how much, in dollars, each share will receive if a company is liquidated and its creditors are paid off.
In dollars, BVPS breaks down the company’s total book value by dividing it by all of the company’s outstanding shares to get an amount per share. This amount can be compared with the current market price of the share.
Also, some websites list this as a single number called as Price-to-book ratio.
For example, at the end of January 2021, Microsoft Corp. (MSFT) had a book value per share of $ 24.65 and a price-to-book ratio of 14 compared to a share price of $ 242.
How investors use the book value
Book value, book value per share and the price at book value are measures estimated by believers Value investing. This investment strategy boils down to bargain hunting: instead of targeting the best performing stocks, it looks for low-priced, neglected stocks in the hopes that their stock prices will eventually rise again.
To find their bargains, value investors look at a company’s book value and book value per share. If a stock is trading below book value, it could be a good buy – an undiscovered gem.
If the book value per share is higher than the market value per share – the current trading price of the stock – it may indicate an undervalued stock. If the book value per share is lower than the market value per share, it could indicate an overvalued or overvalued stock.
The reason for this is that the book value per share represents the financial strength of a company based on its assets, an objective quantity, while the market value per share represents the attractiveness of a company’s share in the market, a subjective quantity.
The limits of the book value
Book value is best used in companies that have physical assets such as factories, machinery, and other equipment, as opposed to companies that do not have many physical assets, such as like Facebook or
These companies mainly own intangible assets, such as intellectual property, that make up the bulk of their value. So when calculating the book value for such companies and comparing it to their market value, it is important to understand why the book value number is so.
If the book value of this type of company seems too high or too low compared to a company’s market capitalization, it may not necessarily indicate an overvalued or undervalued stock, but rather the fact that the majority of the assets are intangible assets.
The financial souvenir
The book value is used by investors to obtain an objective assessment of the company’s value. Book value estimates the real value of everything he owns minus his debts. It is made up of the total assets of the company after you subtract the company’s liabilities.
From there, value investors compare book value and its permutation, book value per share, to the price of the company’s share. In this way, they determine whether the stocks are over- or undervalued.
It’s important to use book value and book value per share in the right context and with the right stocks. As a measure, they work better with industrial or legacy companies that own, manufacture, or hold tangible assets than information technology or online service providers.
Still, it can be a start to determining a company’s fundamental value – and a good buy.