Counting The Book Value Of A Company Correctly

what is the book value of a companyWhat is the book value of a company?

Book value is the total amount a company would be worth if it liquidated all of its assets and paid back all its liabilities. As it is based on the value of total assets less the value of total liabilities it serves to measure the net assets a company has built up until the present time. Theoretically, book value is the amount that the shareholders would receive if the company were to be completely liquidated. Book value can also represent the value of a particular asset on the company’s balance sheet after taking accumulated depreciation into account. To calculate book value take a company’s physical assets (including land, buildings, equipments etc.) and subtract intangible assets (such as assets) and liabilities including debts, preferred stock and accounts payable. The company is intrinsically worth the result of this calculation. To know what is the book value of a company the calculation is:

  • Book value = total assets – intangible assets -liabilities.

The book value of company assets are calculated:

  • Book value of an asset = asset’s cost – asset’s accumulated depreciation

Reasons to know the book value of a company and its assets

Knowing book value of a company and its assets is useful for a number of reasons including:

  1. Several studies have shown that price to book value is the most effective valuation measure in determining a stock’s performance. Although the price-earnings ratio (P/E) is considerably more popular, buying at low price-to-book multiples leads to better returns. It is a helpful tool for investors wanting to determine if a company is under-priced or over-priced, which could indicate a potential time to buy or sell.
  2. Market value of company is useful to help track profits and losses. If you have owned an investment for a long period of time, the difference between book and market values indicates the profit (or loss) incurred.
  3. The need for book value also arises when it comes to generally accepted accounting principles. According to these rules, hard assets (like buildings and equipment) listed on a company’s balance sheet can only be stated according to book value. This sometimes creates problems for companies with assets that have greatly appreciated as these assets cannot be re-priced and added to the over-all value of the company.

An option to determine what is the book value of a company is to use our company analysis service.

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Counting The Book Value Of A Company Correctly
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