What is book value?
Book value is the value a company says its FIXED ASSETS are worth on financial reports. Book value shows up on the BALANCE SHEET. People use book value to talk about a company’s ASSETS. It is not the same number as the number for which the company could sell those assets.
What Book Value Is
Book value is how much money a company spends to buy an asset. This is not always how much the asset is worth now. Companies keep records of what they paid for assets. This is the “book value”. The asset could be a building, a machine, or other things the company owns.
Book Value on Balance Sheets
Companies make financial reports every year. One report is called a balance sheet. The balance sheet lists all the assets a company owns. It shows the book value of each asset.
Some assets lose value over time. This is called DEPRECIATION. The asset is “depreciated” on the balance sheet. Its book value goes down each year. But this book value is not how much money the company would get if it sold the asset.
Why Book Value Is Important
Investors and others look at a company’s book value. They want to know how much the company says its assets are worth. But they know the assets could be worth more or less money in the real world.
Book value gives an idea about a company’s assets. But it does not tell the full story. Smart investors also look at other numbers and at the real world.
An Example of Book Value
ABC Company buys a building for $1 million and records this $1 million as the building’s book value on its balance sheet.
After 10 years, the building has depreciated. Maybe only $600,000 of book value is left on the balance sheet. But in the real world, the building might be worth $1.2 million now if ABC sold it. The market value is different from the book value.
Book Value Per Share
You can also look at book value for the whole company. To do this, add up the book value of every asset the company owns. Then, subtract any money the company owes. This gives you the company’s book value.
You can divide this company book value by the number of shares the company has. This gives you “book value per share.” It shows how much money each share would be worth if the company stopped business and sold everything.
Book value per share does not include INTANGIBLE ASSETS. Things like patents, brands or goodwill. Their value is hard to measure. So book value per share leaves them out.
Limits of Book Value
Book value is not a perfect way to measure a company’s assets. It has some limits:
- Book value is based on the past. It shows what a company paid for assets. But their real value now could be very different.
- Some assets are not included. Book value ignores intangible assets. These assets could be worth a lot in the real world.
- Book value uses depreciation. However, depreciation does not always show the real drop in an asset’s value. The asset could still work well and be worth money.
- Companies can use different depreciation schedules. This makes it hard to compare book values between companies.
Book value is just a starting point. To really understand a company’s worth, you need to look at other factors, too. Things like earnings, cash flow, and market value also matter a lot.
The Difference Between Book Value and Market Value
Book value and market value both try to determine a company’s worth, but they use different math to do so. Book value considers the past, while market value considers the future.
What Makes Market Value Different
Market value is what investors think a company is worth. It is based on the company’s stock price. Investors look at what they think the company will earn in the future. That affects the stock price and market value.
Market value changes all the time. As investors’ feelings change, so does market value. When a company reports good news, its market value usually goes up. Bad news usually makes market value go down.
Book Value Is More Stable
Book value does not change nearly as often as market value. The assets a company owns stay the same. They only change when the company buys or sells assets. Or when assets depreciate on the books. So book value is more stable than market value. It moves more slowly.
Why the Difference Matters
Book value and market value tell different stories about a company. Comparing them helps investors make good choices.
If market value is a lot more than book value, investors think the company will do well. They expect higher profits in the future. They will pay more for the stock. This makes a high market value.
If market value is close to book value, investors are less sure. They see some risk in the company. The company’s future is not as bright.
And if market value is a lot less than book value, the outlook is not good. Investors do not expect much profit in the future. They could be worried about the company’s survival. The company might need new plans to win back investors.
