What is Book Value?

Book value is a company’s equity as reported in its financial statements. It is typically viewed concerning the company’s market capitalization and is determined by taking the total value of a company’s assets and subtracting any of the liabilities the company still owes.

The Formula for Calculating Book Value

Book Value = (Total Common Shareholders Equity – Preferred Stock) /Number of Outstanding Common Shares.

A company’s book value is the net difference between that company’s total assets and total liabilities, Where It reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated. An asset is equivalent to its carrying value on the balance sheet.

It is often lower than a company’s or asset’s market value. BVPS and the price-to-book (P/B) ratio are utilizing book worth in fundamental analysis.

Book Value

Importance of Book Value

  • It is important to investors because it provides an overview of a company’s total worth.
  • It is primarily important for investors to use a value investing strategy because it can enable them to find bargain deals on stocks, especially if they suspect that a company is undervalued and/or is poised to grow, and the stock is going to rise in price.
  • Widely-used financial metric to determine a company’s value and to ascertain whether its stock price is over-or under-appreciated.

Limitations

  1. Not Always Up to Date.
  2. Potentially complicated.
  3. Intangibles Are Not Included.
  4. Does Not Consider Quality.

Example
A company spends 100,000/- to buy a machine and subsequently spends an additional 20,000/- for additions that expand the production capacity of the machine. A total of 50,000/- of accumulated depreciation has since been charged against the machine, as well as a 25,000/- impairment charge. The book value of the machine therefore 45,000/-.

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