When it comes to determining the value of a company to determine whether to invest, one of the most important measures is book value. The book value of an asset can give you a sense of whether its shares are overvalued or undervalued at any given time. Book value is different in some ways from market value, so you have to understand the best methods of determining each of these figures. With this in mind, the book value is the total aggregation of the assets a company has on its books. It is a way of looking at everything a company owns to determine what is tangible. By knowing this, would-be investors can better understand whether there is some real, underlying value to an asset.
Calculating book value
The place to start when calculating the book value of a company is that company’s balance sheet. If you’re looking for information on a publicly traded company, this information should be easy to find either in SEC filings or in the company’s investor disclosures. If you want this information from a private company, you will have a bit more trouble. Private companies are under no obligation to share this information. You’ll often need to be engaged in the process of trying to acquire that company to get access to its balance sheet.
Once you have found the balance sheet, calculating book value is all about adding up the cost of known assets. You can add up the cost of all assets owned by the company first. From there, you will subtract the amount of depreciation of those assets. Over time, assets owned by companies tend to depreciate. Over time, companies take that depreciate for tax benefits. However, this impacts the underlying value of the owned assets, whether they are buildings, properties or something like mineral rights.
Why calculating book value makes sense
Many investors are looking for an objective measure of where a company stands in comparison to the market. When looking at other measures of valuation, would-be investors can get distracted by noise. There are too many factors in play that can obscure what the company is actually worth. Many of the smartest investors in the world note that assets are semi-permanent. While the market might move and shift on a company, the land that company has acquired to build its new locations is a more permanent entity. Having this information can help one see where a company’s true value lies.
The limitations of book value
You might be wondering where in the book value of a company you add in the cost of intellectual property. This is surely an asset, and it won’t be listed on the balance sheet. The answer is that book value does not take into account these intangible assets. In the modern economy, intellectual property, customer lists and other intangible assets have never been more important. Measures of value that fail to consider these metrics can often fail to give a true snapshot of a company’s worth.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!