THE BOOK VALUE

The book value is, simply put, the total worth of a company’s assets, minus its total liabilities. It is often viewed as the worth of the company as owned by the shareholders. Book value is a crude measurement of company value, but it is nonetheless useful in calculating other rubrics by which to measure a stock’s potential for growth or loss.

Calculating book value is a fairly labor-intensive process, and generally it is preferable to find a source, such as the company itself, to provide the book value. The book value is basically the worth of the company were it to go out of business at that moment, liquidating all of its hard assets. For this reason, book value is primarily of interest to value investors, who want to know where a company stands currently. Book value ignores profits, potential for future growth, and many other factors that imply the worth of a company’s stock in the long run.

In addition, book value generally ignores many non-tangible assets, such as the long-term market value of intellectual property. As a result, book value for companies that subsist primarily on their intellectual property will tend to be much lower than companies whose revenue is generated by physical assets which can be sold off as-is. So a retailer will have a much higher book value than a mining company, which will in turn have a much higher book value than a book publisher.

When using book value to calculate other rubrics useful in gauging a stock’s worth, one generally uses the book value per share. To determine this, one simply takes the total book value of the company and divides it by the total number of that company’s outstanding shares. Because this is the only way the measurement is useful in fundamental analysis, analysts may use the term book value as shorthand for book value per share.