Book Value can be defined as the total worth of the company in case of liquefying of its assets in order to pay back its all liabilities. Another definition of the book value is the value of a particular asset on the balance sheet of the company. This value of the asset is recorded after taking the accumulated depreciation of the asset into the account.
Calculation of the Book Value
In order to calculate the book value of the company we need to in account the physical assets of the company. The physical assets of the company include land, building, manufacturing plants, equipments, computers and other related stuff. In the next step the intangible assets are subtracted from the physical assets of the company. The intangible assets include patents and liabilities of the company. In addition to that preferred stock, debt and accounts payable is also included in the intangible assets of the company. The calculation of book value can be done as under:-
Book Value = Total Assets – Intangible Assets – Liabilities
Importance of Calculating Book Value
Since book value represents the intrinsic net worth of a company, it is a helpful tool for investors wanting to determine if a company is underpriced or overpriced, which could indicate a potential time to buy or sell. For instance, value investors search for companies trading for prices at or below book value (indicating a price-to-book ratio of less than 1.0), which implies the shares are selling for less than the company’s actual worth.
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