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- What is book value?
- How to calculate book value and book value per share
- What is book value per share?
- How investors use book value
- The limits of book value
- The bottom line
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- The book value of a company is the total worth of all its assets minus all its liabilities.
- Investors compare a company's book value to its stock price, to judge if shares are under- or overpriced.
- Book value works best on hard-goods companies, vs service providers or firms with intangible assets.
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When investigating which stocks to buy, investors often have to look hard into companies' financials. One of the big things they look at is book value.
Book value is a calculation that aims to determine the actual, complete worth of a company, based on its assets. It's basically the break-up value — the amount that the company would be worth if it were liquidated.
Investors use book value to help them judge if a company's stock is overpriced or underpriced.
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Let's dive more deeply into book value, how it's calculated, and its significance.
What is book value?
Book value actually has two related meanings. In the accounting world, book value refers to the worth of a particular asset on a company's balance sheet — say, a piece of property or equipment. The book value of the asset is its original cost, minus depreciation (its declining value as it ages or gets used up). It's mainly used for tax purposes.
In the investing/financial world, book value's meaning is an expanded, extrapolated version of the first definition. It's the total value of all the company's assets — the worth of all the goods, properties, funds, and other things it owns — minus its liabilities — its expenses and debts. Usually, the worth of any intangible assets, like intellectual property or patents, is subtracted too.
This sum aims to put a number on what a company's actually "worth." It's the amount that theoretically represents the company's breakup value. If the company went under or was dismantled and sold off, this book value would be used to determine what individual stockholders would receive — roughly, the cash value of their individual shares.
Book value is not often included in a company's stock listings or online profile. To find its book value, you have to look at its financial statements, and all the assets and liabilities listed on its balance sheets. Add up all the assets, subtract all the liabilities and the result is the book value.
What is book value per share?
While you have to calculate book value yourself, most online stock listings do include a related metric that's also useful to investors: the book value per share (BVPS). Book value per share shows how much in dollar terms each share will receive if a company is liquidated and its creditors are paid off.
Expressed as a dollar amount, BVPS breaks the company's overall book value down by dividing it by all the company's outstanding shares, to come up with a per-share amount. This amount can be compared to the share's current trading price.
Some sites also list this as a single figure, called the price-to book ratio.
For example, at the end of January 2021, Microsoft Corp. (MSFT) had a book value per share of $24.65, and a price to book ratio of 14, compared to a share price of $242.
How investors use book value
Book value, book value per share, and the price to book value are measures prized by believers in value investing. This investment strategy boils down to bargain-hunting: Rather than targeting the best-performing equities, it seeks out low-priced, neglected stocks in the hope that their share prices will eventually rise again.
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To find their bargains, value investors look at a company's book value and book value per share. If a stock is trading below its book value, it could be a good buy — an undiscovered gem.
If the book value per share is higher than its market value per share — the stock's current trading price — then it can indicate an undervalued stock. If the book value per share is lower than its market value per share, it can indicate an overpriced, or overvalued stock.
The reasoning for this is that book value per share represents the financial strength of a company based on its assets, an objective number, whereas market value per share represents the attractiveness of a company's shares in the marketplace, a subjective number.
The limits of book value
Book value is best used with companies that have physical assets, such as factories, machinery, and other equipment, as opposed to companies that don't have many physical assets, such as technology firms that primarily operate on an idea or service provided online, such as Facebook or Netflix.
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These companies mainly have intangible assets, such as intellectual property, that are the bulk of their value. So when calculating book value for companies like this and comparing them to their market value, it's essential to understand why the book value number is what it is.
With these sorts of firms, if book value appears too high or too low when compared to a company's market cap, it may not necessarily indicate an overvalued or undervalued stock, but rather the fact that the bulk of its assets are intangible assets.
The bottom line
Book value is used by investors to gain an objective estimate of a company's worth. Book value estimates the actual value of everything it owns, minus everything it owes. It consists of the company's total assets after you subtract the company's liabilities.
From there, value investors compare book value and its permutation, book value per share, to the price of the company's stock. That way, they determine whether its shares are overpriced or underpriced.
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It's important to use book value and book value per share in the right context, and with the right stocks. As measures they work better on industrial or old-line companies that own, make or hold tangible assets, as opposed to info tech or online service providers.
Still, it can be a start towards determining a company's fundamental worth — and a good buy.
Ali Hussain
Ali Hussain
Ali Hussain worked in credit risk management, analyzing the risk factors of doing business with hedge funds. He started his career with Deutsche Bank and worked at other large financial institutions, such as Citigroup, Bear Stearns, and Societe Generale. After a few years spent in risk management, Ali moved to the front office where he worked in Sales & Trading, covering the sales aspect of the futures clearing business. Ali completed his master's degree in journalism from Columbia University, writing on a variety of topics at school and then embarking on a freelance career upon completion of his degree. In addition to Insider, Ali has written for various publications, including the Huffington Post and Narratively.
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As a seasoned financial expert with a background in credit risk management and experience working with major financial institutions such as Deutsche Bank, Citigroup, Bear Stearns, and Societe Generale, I bring a wealth of knowledge to the table. My expertise lies in analyzing risk factors, sales and trading, and financial journalism, making me well-equipped to delve into the intricacies of various financial concepts. Let's explore the key concepts discussed in the article.
Concepts Covered in the Article:
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Book Value:
- Definition: The total worth of a company's assets minus its liabilities.
- Calculation: In the financial world, it's the total value of all assets (goods, properties, funds) minus liabilities (expenses and debts).
- Usage: Investors use book value to assess if a company's stock is overpriced or underpriced.
-
Book Value Per Share (BVPS):
- Definition: The amount each share would receive if a company is liquidated, calculated by dividing the overall book value by the number of outstanding shares.
- Usage: Investors compare BVPS to the current share price to evaluate if a stock is undervalued or overvalued.
-
Price-to-Book Ratio:
- Definition: A figure derived from BVPS and the current share price.
- Usage: Provides a quick assessment of a stock's relative value; a lower ratio may indicate an undervalued stock.
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Value Investing:
- Strategy: Involves seeking out low-priced, neglected stocks with the expectation that their share prices will rise.
- Use of Book Value: Value investors analyze a company's book value and BVPS to identify potential bargains.
-
Limits of Book Value:
- Applicability: Works best for companies with physical assets; less effective for those with primarily intangible assets (e.g., technology firms).
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Contextual Application:
- Industry Relevance: Book value and BVPS are more effective for industrial or old-line companies with tangible assets than for technology or online service providers.
Expert Insights:
- Key Consideration: Book value is a valuable metric for gaining an objective estimate of a company's worth.
- Calculation Insight: Book value is determined by subtracting all liabilities from the total value of a company's assets.
- Investor Perspective: Investors use book value and BVPS to assess whether a company's shares are overpriced or underpriced.
- Industry Relevance: It's crucial to consider the nature of a company's assets (tangible vs. intangible) when applying book value.
Conclusion:
In the realm of finance, understanding book value and related metrics is essential for investors seeking to make informed decisions. The article provides a comprehensive overview of these concepts, emphasizing their significance and applicability in evaluating a company's fundamental worth. Whether you're a seasoned investor or someone just starting, grasping these concepts is fundamental to navigating the intricacies of the financial landscape.
