Determining a company’s worth and whether its stock price really determines its value can be hard. You can take a look at the market cap. Or the other way is to find its balance statement and take a look at the book value to evaluate stock.
The Definition of a Book Value
The book value of a company is calculated by subtracting its liabilities from its assets. In other words, it defines the total value of the company’s assets without intangible assets that do not have immediate cash value, like goodwill.
Or, imagine if you want to close a business, the book value represents the amount of money left after you pay all of your obligations and sell all of the assets. Meanwhile, the company’s liabilities include the money owed by the company and its operating expenses.
To calculate the book value of a company, you can use the following formula.
Book Value = Assets – Liabilities
The viable growing companies usually are more worth than what is represented in its book value. That is because these companies are able to generate massive earnings and growth.
The Ways to Use Book Value in Investing
Book value usually is more meaningful for value investors. Since they usually look at the book ratio to find the relation between stock prices.
If you want to compare the value of companies, you can convert the number into a book value per share. To do that, you need to divide the book value by the outstanding shares.
The Other Things to Consider in Stock Investing
The book value and book value per ratio of a company are just two components to value stocks for your investment. You cannot make a purchase only based on these two calculations.
Here are a few other common calculations that you want to check before you purchase a stock.
- Earnings per share (EPS): It represents the company’s profit for each share of stocks.
- Price to earnings ratio (P/E): It represents the currents price of shares against the price per-share earnings.
- Projected earnings growth (PEG): It represents the comparison between the price to earnings ratio and the growth ratio.
