What is Book Value?
Book value is the net value of assets within a company. In the UK, book value is also known as net asset value. It shows the current position of the asset base after liabilities are taken into account.
There are various equations for calculating book value. The first equation deducts accumulated depreciation from the total assets to get the book value amount. Accumulated Depreciation is the cumulative wear and tear that an asset goes through during a certain period of time. Accumulated depreciation is calculated by adding depreciation from all the previous years.
The second equation takes into account intangible assets and liabilities. Intangible assets and liabilities are deducted from the total asset amount to calculate the book value of the asset. Intangible assets are assets that do not have physical attributes. One example of an intangible assets is intellectual property, like music, digital artwork, etc. Liabilities are the outstanding obligations that a company has to pay back within a limited period of time. Examples of liabilities are loans and accounts payable.
The third equation is related to the opening expenditure of a particular investment. When book value is calculated using this method, it may or may not include the operating expenses. These would be the expenses incurred during the day to day running of the company.
The Importance of Book Value
Book value is the value of the company that will be posted on the balance sheet. You can analyze and compare companies by checking their book value. It's helpful to gather at least five years of balance sheet data in order to properly analyze book value figures. It will allow you to create a year over year analysis of financial progress.
Book value is important to both investors and shareholders. The reason they are concerned with book value is because it shows the value that the company will generate when it ceases trading. Generally speaking, when a company stop trading their assets are redistributed. The value of the assets is largely dependent on the book value. Consequently, higher book value represents a greater return for the investors and shareholders.
Uses of Book Value
Book value is used to determine the market position of a company. This is done by comparing the book value figure with the market value of the company. This comparison shows if the share prices are a true representation of the net worth of the company, making it possible to investigate if the share price is overstated or understated.
Personal Finance
When an individual buys shares in a company, the first figure they look at is book value. The reason is that book value is the the price that a person will pay for a company's share. The price the shareholder pays for buying a share varies with the market conditions.