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Book Value: Definition and its Purposes

Sarmaaya Desk
Sarmaaya Content Team

Key Takeaways

  1. Book value is a company’s equity value mentioned in the company’s balance sheet.
  2. It is a widely used metric to determine whether stock prices are overvalued or undervalued.
  3. Difference between book value and selling price of the stock is capital gain or loss from the investment.

What is Book Value?

It tells you about the value of an asset as mentioned in the Balance sheet. This value is based on the original cost of the asset minus any impairment cost, depreciation and amortization. It is the value of company’s total assets less the intangible assets and liabilities. However, practically it may also include goodwill. The value associated with the workforce and intellectual capital is ignored. Once these are ignored, it is then referred to as ‘tangible book value’.

 

Mutual Funds

It is a widely-used and understood metric for determining a company’s value and whether or not its stock prices are undervalued or overvalued. Thus, it is imperative for investors and analysts to pay attention to it.

 

Understanding

It is used for 2 purposes:

  1. It depicts the total value of the company’s assets which the shareholders will receive if the company was hypothetically liquidated.
  2. It can help indicate whether a stock is underpriced or overpriced when compared to a company’s market value.

Book value of an investment in personal finance is the price paid for debt investment or security. When a company sells a stock, the difference between book value and selling price of the stock is the capital gain or loss from the investment.

Considering how a company’s book value represents the worth of shareholding, comparing it with a market value of the shares can prove to be a reliable valuation technique when trying to determine whether shares are priced fairly, or not.

However, it is important to note that there are limitations to how accurately it can be used as a proxy for the market value of the shares because assets may experience an increase or decrease in their market value.

 




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