Book Value Formula & Application
In this article we are going to see what is the Book Value (BV) of a company?
1.Book Value is the net worth of a company. It tells an investor how much a company is worth if it ceased operating today, sold all its assets and paid off all its debts.
In case of individuals, Net worth = Tangible Assets – Liabilities. In case of companies, Equity capital and reserves get added to this net worth,
Where Equity capital = Face Value * No of shares
2. Thus, BV of an asset is its carrying value on the balance sheet and it is calculated by netting the assets against its accumulated depreciation.
3. BV is also the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities.
Example of Book Value of a Company
For Example, Company ABC Pvt. Ltd. is having:
Plant & Machinery, Inventory, Real Estate etc = Rs.150 Crore
Cash = Rs. 100 Crore
Share Capital = Rs. 50 Crore
Patents = Rs. 30 Crore
Total Liabilities of ABC Pvt. Ltd. = Rs. 100 Crore
Therefore, Total Assets = 150+100+50+30= Rs. 330 Crore. Intangible Assets = Rs. 30 Crore
Thus, BV of ABC Pvt. Ltd.
= Total Assets – Intangible Assets – Liabilities
= Rs. 330Crore – Rs. 30Crore – Rs. 100Crore
= Rs. 200 Crore
By comparing book value of equity to its market price, we get an idea of whether a company is under- or overpriced. Price to Book value ratio is useful for businesses in capital intensive industries like energy, manufacturing, automobile etc. For example, BV/Share of Indian Oil Corporation is Rs.130.07 and its current stock price is Rs.148.05, while BV/Share of Hindustan Petroleum Corporation Ltd is Rs.174.21 and its current stock price is Rs. 232.70. It is always better to compare the companies within the same industry.
Summary of Book Value
As an accounting value of a company, Book Value has two main uses:
- It corresponds to the total value of the company’s assets that shareholders would suppose to receive if a company were liquidated. BV is never known with certainty till it is actually realised.
- When compared to company’s market value, book value can indicate whether a stock is underpriced or overpriced.