Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Book Value

What it is:

Book value is the value at which a company carries an asset on its balance sheet. It is equal to the cost of the asset minus accumulated depreciation:

Book value = Cost of the asset - Accumulated depreciation

How it works (Example):

Let's assume Company XYZ bought a MegaWidget for $100,000 three years ago. The MegaWidget depreciates by $10,000 a year. Thus the book value of the MegaWidget is:

$100,000 - $10,000 (year 1 depreciation) - $10,000 (year 2 depreciation) - $10,000 (year 3 depreciation) = $70,000

If Company XYZ sells the asset for, say, $90,000 today, it likely will have to record a $20,000 capital gain ($90,000 sale price - $70,000 book value at time of sale = $20,000).

Why it Matters:

Book value is one of the most popular financial measures, particularly when it comes to valuing companies. When a company's book value is below the actual market value of the company, the company may be overvalued. Likewise, if the company's book value is above the actual market value, the company might be undervalued.

The disparity highlights one very important aspect of book value: it is usually not what an asset (or company) might be really worth today. In other words, book value is not the same as market value.

Related Terms View All
  • Leasehold
    For example, let's say that Company XYZ leases a widget-making machine from Company ABC....
  • Greenwashing
    Let's say Company XYZ produces a new line of plastic food containers. It labels the...
  • Tax-Advantaged
    One of the best examples of tax-advantaged investing is the 401(k) plan. Offered by...
  • Obligation Bond
    The face value of an obligation bond is usually larger than the value of the property...
  • G7 Bond
    The G7 nations include the United States, Canada, the United Kingdom, France, Italy,...