Table of Contents
- What Is Book Value?
- Key Takeaways
- How Book Value Works
- Important Note on Book Value Types
- Book Value Per Share (BVPS)
- Fast Fact on Shares
- Price-to-Book (P/B) Ratio
- Examples of Book Value
- Why Is It Called 'Book Value'?
- What Does a Price-to-Book Ratio of 1.0 Mean?
- Why Is Market Value Often Higher Than Book Value?
- The Bottom Line
What Is Book Value?
Let me explain book value directly: it's the value of a company's assets after you deduct its liabilities. This figure gives you an approximation of what shareholders would get if the company were liquidated. As an investor, you can use this metric to figure out if a company is undervalued or overvalued.
Key Takeaways
You should know that book value often differs from a company's market value. Metrics like book value per share and the price-to-book ratio are key in fundamental analysis. If the book value per share is lower than the market price, it might mean the stock is overvalued. Typically, market value is higher than book value because it includes investor views on intangible assets.
How Book Value Works
Book value refers to a company's shareholders' equity, which is the value of all assets after subtracting liabilities. It represents the net worth or what the company would be worth to shareholders in a liquidation. While it provides a basic view of net worth, book value isn't always accurate since it uses historical data and ignores intangible assets like patents and trademarks. It's also distinct from market value, which reflects current investor sentiment and future expectations.
You can find shareholders' equity, along with assets and liabilities, on the balance sheet. Book value helps you in two main ways: it's used with other ratios for valuation, and when compared to market value, it shows if a stock is underpriced or overpriced. It's also part of ratios that assess financial health.
Important Note on Book Value Types
There's a separate book value accountants use internally for valuing assets in managerial accounting, which differs from the investor-focused book value we're discussing here.
Book Value Per Share (BVPS)
Book value per share, or BVPS, is the book value divided per share. You can calculate it from the balance sheet by dividing total common shareholders' equity by the number of outstanding common shares. Subtract any preferred stock from total shareholders' equity first. The formula is BVPS = (Total Shareholder Equity - Preferred Stock) ÷ Total Common Shares Outstanding.
For example, if a company has $21 million in shareholders' equity with no preferred stock and two million outstanding shares, BVPS is $10.50. If the market price is higher than this, the stock might be overvalued.
Fast Fact on Shares
Note that outstanding shares differ from issued shares, though some reports might use the terms interchangeably.
Price-to-Book (P/B) Ratio
The price-to-book ratio, or P/B, is useful for comparing similar companies in the same industry with uniform accounting. It shows how the market values the stock relative to BVPS. However, it's not ideal for cross-industry comparisons due to different asset recording methods. A high P/B isn't always a premium, and a low one isn't always a discount across sectors.
Calculate it by dividing market price per share by BVPS. Using the earlier example, if market price is $13.17 and BVPS is $10.50, P/B is 1.25, suggesting a premium and possible overvaluation.
Examples of Book Value
On a balance sheet, shareholders' equity shows the claim after liabilities. For Amazon in 2024, total stockholders' equity was $285.97 billion, which is its book value, calculated by adding preferred stock, common stock, treasuries, additional paid-in capital, accumulated other comprehensive income, and retained earnings. Companies might include other items like unrealized gains or losses depending on their industry.
For Coca-Cola, the equity attributable to shareowners was $24.86 billion, serving as its book value. Comparing this to market value helps you decide if shares are fairly priced.
Why Is It Called 'Book Value'?
The term comes from accounting, where 'books' refer to journals and ledgers, and bookkeeping is another name for accounting.
What Does a Price-to-Book Ratio of 1.0 Mean?
A P/B of 1.0 means the market price equals book value, which value investors might see as a good buy since market prices usually include a premium.
Why Is Market Value Often Higher Than Book Value?
Book value only uses tangible shareholder equity and misses intangibles like patents, brand value, and goodwill, plus human capital and future growth. Market value, set by buyers and sellers, accounts for these, making it generally higher.
The Bottom Line
In summary, book value is total assets minus liabilities, equaling shareholders' equity. Market value is usually higher due to intangibles and growth prospects. As a value investor, look for low book values relative to strong fundamentals to find undervalued companies.
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