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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