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Book Value

Book value is a measure of what a firm's assets are worth after deducting for depreciation and other claims on the company, such as short- and long-term liabilities. In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. A company's book value is its total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately.

Assets, of course, are only worth what a buyer is willing to pay for them. A company is likely to have a hard time finding a buyer to pay book value for an antiquated factory or obsolete inventory. This limitation aside, book value is still a useful metric for valuing stocks.

Tangible book value measures physical assets, such as factories, office buildings, real estate and inventories. Excluded from tangible book value are such intangible items such as patents, trademarks and the premium paid when acquiring another company--goodwill.

To clearly distinguish the market price of shares from the core ownership equity or shareholders' equity, the term 'book value' is often used since it focuses on the values that have been added and subtracted in the accounting books of a business (assets - liabilities). The term is also used to distinguish between the market price of any asset and its accounting value which depends more on historical cost and depreciation. It may be used interchangeably with carrying value.

Stock pricing book value

The book value of a stock is the actual worth of the stock as in company books. That is the net asset of a company after deducting all liabilities divided by the number of Stocks of the company.

By general knowledge you may say that the company shares should be traded at the book value. But as a stock analyst this may not be a fair thing to say.You need to couple Book Value and EPS to arive at a fair price of a stock.

Take for example, a stock has a book value of 100 and its EPS is 12. Also the company EPS is growing at a rate of 15% per year. This will mean that the company book value will be on rise in future too. So at the end of year 1 we are very sure that the book value will stand at 115, 2nd year 132.25 and so on. So you approximately know that by 4 years the book value will be around 200. Thus when your other investments may be at say 120, your book value will be 200. Thus you may discount the current book value by a fair factor.

Uses

Book value appeals more to value investors who look at the relationship to the stock's price by using the Price to Book ratio. You calculate the P/B by taking the current price per share and dividing by the book value per share.

         P/B = Share Price / Book Value Per Share

Like the P/E, the lower the P/B, the better the value. Value investors would use a low P/B is stock screens, for instance, to identify potential candidates.

It is a valuation metric that sets the floor for stock prices under a worst-case scenario. When a business is liquidated, the book value is what may be left over for the owners after all the debts are paid. Paying only a price/book = 1 means the investor will get all his investment back, assuming assets can be resold at their book value. Shares of capital intensive industries trade at lower P/B ratios because they generate lower earnings per dollar of assets. Business depending on human capital will generate higher earnings per dollar of assets, so will trade at higher P/B ratios.

Book value per share can be used to generate a measure of comprehensive earnings, when the opening and closing values are reconciled. BookValuePerShare, beginning of year - Dividends + ShareIssuePremium + Comprehensive EPS = BookValuePerShare, end of year.

Changes are caused by the sale of shares/units by the business increases the total book value. Book value per share will increase if the additional shares are issued at a price higher than the pre-existing book value per share.

The purchase of its own shares by the business will decrease total book value. Book value per share will decrease if more is paid for them than was received when originally issued (pre-existing book value per share.

Dividends paid out will decrease book value and book value per share/ Comprehensive earnings/losses will increase/decrease book value and book/sh. Comprehensive earnings, in this case, includes net income from the Income Statement, foreign exchange translation changes to Balance Sheet items, accounting changes applied retroactively, and the opportunity cost of options

 
 

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