Ask a fool: what is book value and why is it important to investors?


Q: What does “book value” mean and why is it useful to me as an investor?

Book value is one of the easiest investment metrics to calculate. Look at a company’s balance sheet and subtract the company’s total liabilities from its total assets. To calculate the book value per share, divide that number by the number of shares outstanding.

A good way to visualize book value is if a business were to go out of business, sell all of its assets, and pay off all of its liabilities, the book value is (theoretically) what investors would be left with.

A similar measure is tangible book value, which is the same calculation but excluding intangible assets such as intellectual property and goodwill.

From an investor’s perspective, book value is very useful for finding attractive value stocks and for comparing valuations of similar companies. As a current example, the investment banking giant Goldman Sachs is near the top of my watch list, in part because it’s trading at 5% below its tangible book value, one of the cheapest valuations in the banking industry.

On the other hand, book value is not very useful when it comes to valuing growth stocks, as they tend to trade primarily based on their potential for future profit generation, and not on the basis of their potential for future profit generation. the present value of the company’s assets. To name just a few growth stocks that I am, Square and Amazon are trading at approximately 23 and 21 times their respective book values.

Finally, like any other metric, book value is most useful as part of a comprehensive analysis, not as a stand-alone metric.


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