What Is Book Value?

What Is Book Value?

 

DEFINITION

Book value is a term that describes the basic net worth of a company. It’s the total of its assets minus its liabilities.

Key Takeaways

  • Book value is a measure of a company’s net worth. It is the assets minus the liabilities.
  • You can use it to assess a company’s value in relation to its total available shares and price per share.
  • It’s important to evaluate book value along with other metrics before you decide whether a stock is a good choice for you to invest your money.

Definition and Examples of Book Value 

Simply put, a company’s assets and fewer liabilities equal its book value. This refers to the overall worth of all assets, excluding intangibles like goodwill that don’t have a quick monetary value. All debts, whether short-term or long-term, are included in liabilities.

Assets minus liabilities equal book value.

In other words, if you decided to shut down the company, how much cash would be left over after you sold off all of the assets and paid off all of the debts? The company’s book worth is that.

Consider a company with $2 million in total assets and $1 million in unpaid obligations. It would have a $1 million book value.

Alternative terms: shareholder equity and the net value

How to Use Book Value When You Invest

Simply expressed, a company’s book value is equal to its assets less its liabilities. This is the total value of all assets, excluding intangibles like goodwill that are difficult to quantify. Liabilities comprise all debts, whether short-term or long-term.

Liabilities with fewer assets equal book value.

To put it another way, how much money would be left over after all debts and assets were sold off if you were to close the business? That is the book value of the business.

 

Take a look at a business with $2 million in total assets and $1 million in outstanding liabilities. Its book value would be $1 million.

 

alternative terms: net value and shareholder equity

The Limits of Book Value

A company’s book value put simply, is equal to its assets less its liabilities. This is the entire worth of all assets, excluding ill-defined intangibles like goodwill. All debts, whether short-term or long-term, are considered liabilities.

Assets minus liabilities equal book value.

 

Or, to put it another way, if you were to liquidate the firm, how much money would be left over after all liabilities and assets were sold off? That is the company’s book value.

 

Consider a company with $2 million in assets overall and $1 million in unpaid obligations. It would have a $1 million book value.

Other Vital Values for Investors

 

You won’t want to fully commit to an investment until you have a solid understanding of a wide variety of other factors that contribute to the value of a company. The following is a list of some popular terminology that you should probably familiarise yourself with and make sure you understand:

  • Earnings per share (EPS): This is the portion of a company’s earnings that is allocated to each share of stock held by shareholders.
  • Price-to-earnings ratio (P/E): This compares the current price of a share to the profits that are generated per share.
  • Projected earnings growth (PEG): This analysis compares the price-to-earnings ratio to the growth ratio for the given stock.
  • Price-to-sales ratio (P/S): The market capitalization of a corporation is calculated by deducting its most recent year’s revenue from that total. P/S can also be found by dividing the price of a stock per share by per-share revenue.
  • Dividend payout ratio: This figure presents a comparison between the total net income of the firm and the total dividends that were distributed to investors.
  • Dividend yield: This is a percentage of the current price of a share, which can be calculated by first dividing the yearly dividend of a company by the price of a share at the moment, and then multiplying the result by 100 in order to get a percentage.
  • Return on equity (ROE): The return on equity metric is used to determine how profitable a firm is in comparison to the book value of its shareholders’ equity.

 

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