Book Value Definition
The sum that shareholders would get if a company’s assets were sold off and all of its debts were settled is known as book value. Because they are valued more than common shares throughout the liquidation process, preferred shares are not included in this computation. A bank’s book value may be higher than that of a bank that holds less financial products. Financial instruments are tradable assets or collections of capital.
Compared to businesses like consultants, stock dealers, and video game producers, enterprises that hold a lot of real estate, inventory, machinery, and equipment may have a higher book value. These businesses rely on “human capital,” which is the worth of a worker’s skill set from an economic standpoint.
Assets included on a company’s financial statements are:
- Cash
- Cash equivalents, including Treasury bills and short-term certificates of deposit
- Investments
- Accounts receivable
- Inventory
- Property
- Plant
- Equipment
- Intellectual property
- Brand names.
Liabilities that appear on a company’s financial statements are:
- Debt obligations
- Supplier bills
- Bond interest
- Accounts payable
- Rent
- Utilities
- Salaries
- Dividends payable
- Pension fund liabilities
- Taxes Outstanding
- Wages.
Book Value Formula
The formula for determining book value is: where book value is defined as the difference between a company’s total assets and its total liabilities.
Total Assets – Total Liabilities equals book value.
A corporation with $100 million in assets and $60 million in liabilities would have a book value of $40 million.
Book Value Per Share Formula
The method for calculating book value per share, or BVPS, is as follows: BVPS = Book Value / Outstanding Shares
A corporation with a $100 million book value and 25 million shares still outstanding would have a $4 BVPS.
Price-to-Book (P/B) Ratio
Investors, particularly value investors, can spot overpriced or undervalued businesses using the price-to-book ratio (P/B). P/B is computed by dividing a company’s stock price per share by its book value per share, and it compares a company’s market capitalization to its book value:
P/B stands for Market Price / Book Value for each Share.
A corporation with an $846.35 price per share and a $26.95 book value per share would have a P/B ratio of 31.41.
What’s a Good P/B Ratio?
The price-to-book ratio (P/B) is a tool that allows investors, especially value investors, to identify overvalued or undervalued companies. P/B relates a company’s market capitalization to its book value by dividing its stock price per share by its book value per share:
Market Price / Book Value for Each Share is referred to as P/B.
A company with a share price of $846.35 and a book value of $26.95 would have a P/B ratio of 31.41.
Book Value vs. Market Value
The market value of a corporation is calculated by multiplying the share count by the stock price as of the current day:
Price Per Share X Outstanding Shares equals Market Value.
A business with 2.87 billion outstanding shares and a closing share price of $114.49 would be worth $328.59 billion on the open market.
We can see that the company’s market value is more than four times bigger than its book value by comparing it to the company’s reported book value of $74.67 billion. This suggests that investors hold the firm in high regard.
Limitations of Book Value
Since companies often disclose their book value on a quarterly basis, the book value could not accurately represent the company’s current performance. The book value of a corporation can be significantly impacted by its accounting procedures, particularly those relating to depreciation and amortization. A company’s assets could be subject to liens, and it’s possible that the full cost of selling assets at auction won’t be taken into account.
The amount of a tangible asset’s value that has been consumed is called depreciation. A percentage of an asset’s cost can be deducted from revenue each year while it is still earning money for the firm. Writing down the value of a loan or other intangible asset is the process of amortization, which ties the cost of an intangible asset to the loan.
BV Example
Using Microsoft as an example, the company’s balance sheet (data from June 2012) revealed that its total assets were $121,171.0 and its total liabilities were $54,908.0. We arrived at $66,363 by deducting liabilities from assets, which is the same as the entire amount of common equity, which is $66,363.0.
Microsoft Balance Sheet from Seeking Alpha
Bottom Line
The majority of the businesses included in the key indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, have market values greater than their book values. This is so because the market, and particularly growth investors, place value on the potential for development and profit of these businesses. However, it could be a sign that a firm is overpriced if its market value vastly surpasses its book value.
FAQs
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Is book value the same as equity?
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- Contrary to popular belief, a company’s equity value, or market value, is determined by multiplying its share price by the number of outstanding shares, but its book value is the difference between its assets and liabilities.
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What does it mean if BVPS is greater than the price per share?
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- A company’s stock is deemed cheap if its BVPS exceeds its market value per share, which is the same as its current stock price per share. The stock may be deemed overpriced if the price per share exceeds the BVPS.
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How can book value mislead investors?
The book value of a firm may give investors a false sense of security that, even in the event of bankruptcy, they would still be able to recover their investment. But after a bankruptcy, assets are frequently sold at a significant discount, sometimes for only cents.
