Company book value for the beginners predicts the meaning as the value of the company in their books.
Yes, it is right
Book value is the value of the company including company assets, inventory, investment, some of the companies like banks, railway posses lot of assets in the form of branch office building and railway track revels large book value.
On the other hand, companies like software companies do not require a huge infrastructure or some trading firms may have small book value.
Book value technically the total value of the company assets which the shareholders received in the case of liquidation of the company.
The share price of the company traded in the market is also indicated whether the share is overvalued or undervalued from the Book value of the company.
According to the protocol of the company financial structure, Equity investor have no right to get the first preference on the profit sharing, they will get the left over after paying the creditors, taxes and Preference shareholders.
If the company declare to resolve, the shareholder can calculate the net asset value of the company or Book Value.
You can calculate the value of the company at any point in time by Book Value of Equity per Share.
Book Value is the accounting value of the company assets minus Company Liability. It also reveals the actual value of the company.
Book value formula
The formulae of book value are very easy to understand and there is no rocket science behind it.
The information required for the formula is available on the balance sheet of the company.
Book Value = Equity share capital + retained earning
Measuring the Value of the Company
Book Value per share is the value of the company divided by the corporate-issued or outstanding common shares.
It is not sure that you will get the future prospects of the company just by getting the Book value per share.
You can come nearer to the prediction value of the company.
Why Book Value is Important
Some of We think why we use BVPS as tools of valuation, while it will not provide us the real picture.
- Basically In some cases stock trade below or above Book Value, If the company Books showing good results along with good order book and the share price is trading lower to the Price/BVPS, then it would be a good indicator to open the doors of investment into the company.
- Book Value is easy to calculate for the beginners who like to invest for the first time in the stock market. The psychologically reveals the total assets minus liability to the investor, it is easy to approach for the company valuation like PE ratio, Earning per Share etc.
Book Value drawback
It is true that we will et the company value from BV, but sometimes the valuation of assets which is available in balance sheet unable to reveal company self-created assets like goodwill, trademark etc.
which people are aware just by looking at the logo of the company.
A good example is (Infosys) in India, an information technology company, the actual valuation of the company is hidden in the goodwill and trademark.
Every time you can not rely on the figures available on the balance sheet.
Some time balance sheet or book value doesn’t reflect the current market price of the assets:
If the building is brought for ₹ 2 crores 5 years back and the current value of the building is ₹ 3 crores.
Also Read: What is Dividend Adjusted PEG Ratio
The book value doesn’t reflect the increase in valuations.
If you look reverse on it, some of the machinery is useless which is brought with the huge amount of money due to technical or market changing condition.
That could be another reason for the variation of book value.
Sometimes if the company assets as well liability drops subsequently, you will get the same BVPS for the company.
In that cases, BVPS plays against your approach and you must not fully depend upon the BVPS, You must go for some other ratio like Debt to Equity Ratio, the return of net worth, Operating Profit Margin Ratio etc.
A good analyst wants to work on the Price/BVPS for the company for several years. If there are subsequent changes, you must aware of the reason why.
You also have to compare the results with the company peers for getting better results.
Book value examines the equity holder portion of the profit, also calculate the portion of Shareholder at given period of time.
Also Read: What is Return on Capital Employed