Definition of adjusted book value
What is the adjusted book value?
Adjusted book value is the measure of a company’s valuation after liabilities, including off-balance sheet liabilities, and assets adjusted to reflect true fair market value. The potential downside to using adjusted book value is that a business might be worth more than its reported assets and liabilities because it does not value intangibles, account for discounts, or ignore discounts. contingent liabilities. However, it is not often accepted as an accurate picture of the operating value of a profitable business; however, it can be a way of capturing the potential equity capital available in a business.
Key points to remember
- Adjusted book value is where a valuation is adjusted to reflect fair market value.
- The adjusted book value valuation method is most often used to assign a value to distressed companies facing a potential liquidation or to companies that hold tangible assets.
- The downside to using adjusted book value is that a business might be worth more than its reported assets and liabilities because it fails to measure intangibles.
How adjusted book value works
There are several methods that an investor can use to assign a value or a price to a business. Deciding which form of valuation method to use involves several factors such as the type of business and the availability of information.
The adjusted book value valuation method is most often used to assign a value to distressed companies facing a potential liquidation or to companies that hold tangible assets, such as property or securities. Analysts can use adjusted book value to determine a net price for a company’s value when they anticipate bankruptcy or sale due to financial hardship.
Adjusting a company’s book value involves a line-by-line analysis. Some are simple, like cash and short-term debt. These items are already recorded at fair market value on the balance sheet.
The value of the receivables may need to be adjusted depending on the age of the receivables. For example, receivables that are 180 days past due (and probably bad) will get a discount in value compared to receivables less than 30 days. Inventories may be subject to adjustment, depending on the method of accounting for inventories. If a company uses the Last In, First Out (LIFO) method, the LIFO reserve must be added.
Tangible fixed assets (PP&E) are subject to significant adjustments, in particular the value of land, which is entered in the balance sheet at historical cost. The value of the land would likely be much higher than the historical cost in most cases. Estimates of what buildings and equipment could bring in on the open market need to be made.
The adjustment process becomes more complicated with items such as intangible assets, contingent liabilities, deferred tax assets or liabilities and off balance sheet items (OBS). Additionally, minority interests, if present, will require further book value adjustments. The goal is to mark each asset and liability at their fair market value. Once the values ââof all assets and liabilities are adjusted, the analyst simply needs to deduct the liabilities from the assets to get the fair value of the business.