Book Value

The value of a firm’s equity is subject to extreme change based on the chosen valuation process. There are three methods typically used for share value estimates. The first is Capitalization, the second is Book Value, and the third is Intrinsic Value. The “Book Value” approach to valuing equities measures assets versus liabilities, then divides them by shares outstanding. To determine book value, the equation is very simple.

Divide your result by total shares outstanding to view book value per share.

Book value focuses purely on firm worth after non-physical assets and liabilities have been removed. Book value leaves only the hard assets: inventory, plant, property, and equipment. This measure attempts to measure firms based on literal physical value. Book value is typically far lower than market value, which is often inflated during bull markets, but may be higher than estimates based on stock prices during bear markets.

Book value is not perfect. Sometimes a firm’s value derives valid worth from intangible assets. For example: Popular soda makers, luxury fashion firms, or high end luxury car producers often derive customer loyalty from their intangible brand names. Additionally, these firms often own patents, trademarks, or intellectual property which is highly valuable. These intangible values are subtracted. Firms which are not manufacturing based, such as service firms or technology service firms may be completely misrepresented. These firms have very little tangible assets. There’s little reason that book value would be an accurate measurement. Before you apply book value to these firms, you need to check for high amounts of intangible asset values. You should also check if these intangible assets are legitimate additives to firm value. Lastly, a firm’s asset values may not be the most current value of assets. You will need to ensure that asset values were recently updated.