Book Value
What It Is:
Book value refers to the total amount a company would be worth if it liquidated its assets and paid back all its liabilities. Book value can also represent the value of a particular asset on the company's balance sheet after taking accumulated depreciation into account.
How It Works/Example:
Book value is calculated by taking a company's physical assets (including land, buildings, computers, etc.) and subtracting out intangible assets (such as patents)and liabilities -- including preferred stock, debt, and accounts payable. The value left after this calculation represents what the company is intrinsically worth.
Thus, book value is calculated:
Book value = total assets - intangible assets - liabilities
Why It Matters:
Since book value represents the intrinsic net worth of a company, it is a helpful tool for inv
estors wanting to determine if a company is underpriced or overpriced, which could indicate a potential time to buy or sell. For instance, value investors search for companies trading for prices at or below book value (indicating a price-to-book ratio of less than 1.0), which implies the shares are selling for less than the company's actual worth.
Liability matching is an investing strategy for investors who need to fund a series of future liabilities.
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Cached on June 19, 2013, 2:04 pm