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Balance Sheets Calculations

Book Value

No-nonsense number-crunchers adore this measure because it presents the value of common stock equity based on historical values and thus helps separate fact from fiction and fancy.

What It Measures

A company’s common stock equity as it appears on a balance sheet.

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Why It Is Important

Book value represents a company’s net worth to its stockholders, based on the difference between assets and liabilities plus debt. Typically, book value is substantially different from market value, especially in high-tech and knowledge-based industries whose primary assets are intangible and therefore do not appear on the balance sheet.

When compared with its market value, a company’s book value helps to reveal how it is regarded by the investment community. A market value that is notably higher than book value indicates that investors have a high regard for the company. A market value that is, for example, a multiple of book value suggests that investors’ regard may be unreasonably high—as was shown in the painful plunge of dot-com companies in 2000 and 2001.

The reverse is also true, of course; indeed, it may suggest that a company’s stock is a bargain.

A companion measure is book value per stock. It shows the value of the company’s assets that each stockholder theoretically would receive if a company were liquidated.

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How It Works in Practice

To calculate book value, subtract a company’s liabilities and the value of its debt and preferred stock from its total assets. All of these figures appear on a company’s balance sheet. For example:

Total assets $1,300
Current liabilities −$400
Long-term liabilities, preferred stock −$250
Book value $650

Book value per stock is calculated by dividing the book value by the number of stocks issued:

Book value per stock = Book value ÷ Number of stocks issued

If our example is expressed in millions of dollars and the company has 35 million stocks outstanding, the book value per stock would be $650 million divided by 35 million:

650 ÷ 35 = $18.57

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Tricks of the Trade

  • Related terms include:

    • adjusted book value or modified book value, which is book value after assets and liabilities are adjusted to market value

    • tangible book value, which also subtracts intangible assets, patents, trademarks, and the value of research and development

    • The rationale is that these items cannot be sold outright

  • Book value can also mean the value of an individual asset as it appears on a balance sheet, in which case it is equal to the cost of the asset minus any accumulated depreciation.

  • Though often considered a realistic appraisal, book value can still contain unrealistic figures. For example, a building might be fully depreciated and have no official asset value but could still be sold for millions, or four-year-old computer equipment that is not fully depreciated might have asset value but no market value, given its age and advances in technology.

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