There are multiple definitions of Book Value, be sure to know which definition is being used.
“What do you mean by that?”
1. Book Value is the Net Asset Value of a company. It is a very conservative ‘worst-case’ valuation of what a business would be worth if it had to close down.
Book Value calculation: Total Assets less Intangible Assets less Goodwill less Liabilities.
Book Value per Share ratio: Book Value divided by Number of Shares issued.
Example: The Round Number CompanyGoodwill is also an Intangible so it is included in the calculation. Total Assets = 300; Intangibles = 20; Goodwill = 8; Liabilities = 160 Book Value Of Business = 300 - 20 - 8 - 160 = 112 If the Round Number Company has issued 200 shares; Book Value per Share = 112/200 = 0.56 |
Note: Any term which uses the phrase ‘net asset’ or ‘net assets’ must be examined closely.
2. Another definition of ‘Book Value’ does not subtract the value of Intangible Assets (e.g. Goodwill and Intellectual Property). In this situation, Book Value is the same as Equity.
Book Value calculation: Total Assets less Liabilities.
Book Value per Share ratio: Book Value divided by Number of Shares issued.
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Total Assets = 300; Liabilities = 160 Book Value Of Business = 300 - 160 = 140 If the Round Number Company has issued 200 shares; Book Value per Share = 140/200 = 0.7 |
Be sure to know which definition is being used!
| which definition to use? |
term list.