Too embarrassed to ask: what is book value?
There are many ways to estimate the value of a business. One ratio particularly popular with value investors is the price-to-book ratio, which compares a company’s stock price to its book value.
So what is the book value? It is simply the total value of a company’s assets after subtracting all of its liabilities. You can find it in the balance sheet section of a company’s annual report. It is also known as equity, or net asset value.
Assets are of two main types. Tangible assets include land, machinery, cash – anything you can “touch” (including cash in the bank and other financial assets such as stocks). Intangible assets include brand value or intellectual property rights – assets that you can’t touch, but certainly have value.
Intangible assets are more difficult to value than tangible assets. It is much easier to know what a fleet of vehicles is worth today than it is to place a specific value on a brand at a given point in time. Additionally, many of the costs that create intangible value (such as research and development expenses) never end up on the balance sheet due to accounting policies.
Yet for many companies – technology stocks are one obvious example, but consumer goods companies are another – the value of intangibles may well be much greater than the physical assets they own. As a result, book value is arguably more useful for valuing companies with many tangible assets, such as home builders or banks.
If you divide the stock price by the book value per share, it can give you an idea if the business is cheap or expensive. A price / book value less than one means that in theory you can buy the business for less. what are its assets worth.
In other words, if you could afford to buy the whole business, you could buy it and then immediately sell all of its assets, while making a profit. Of course, this can also imply that investors are skeptical about the true value of the company’s assets.
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