Business, Legal & Accounting Glossary
The value of a security or asset as entered in a firm’s books.
The book value of an asset or group of assets is the price at which they were originally acquired, in many cases equal to purchase price. Book value is therefore relevant in-so-far as it forms the basis of various calculations.
e.g. of nominal capital gains (current value divided by book value), of amortised value (book value adjusted for depreciation) and of several financial ratios (e.g. price to book value [P/BV]).
Book value has two accounting meanings. Book value is the value of an asset on a balance sheet, which is the cost of the asset minus accumulated depreciation. Book value also means the net asset value of a company. This book value is calculated by adding all the assets of a firm and subtracting intangible assets and liabilities. A value investor compares a company’s book value to its market capitalization to determine whether its stock is undervalued. A growth investor tends to believe a company is more valuable than its book value suggests, given the expectation of growing profits. Capital-intensive industries usually have higher book value than high-tech industries. Corporate raiders in the 1980s scrutinized book value in numerous U.S. companies. They found companies whose market capitalization was lower than their book value, then purchased shares of stock in those companies. When they gained a controlling share, the raiders frequently sold off the assets of the companies they took over.
Liabilities are recorded at book value so that the book value of net worth is zero.
The insured value of the sports car was greater than its book value.
Stocks are selling at more than three times their book value.
An organisations capitalised value may be greater or less than its book value.
According to the MSCI, World financials currently trade at 1.2 times x book value.
We have to assume that the owners of those enterprises acquired them at book value.
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This glossary post was last updated: 4th February, 2020