A: Book value is a calculation from the balance sheet of what a company would be worth if it were liquidated. Put another way, book value measures the difference between a company’s assets and its liabilities. So if assets were $100 and liabilities amounted to $90, book value would be $10. It is meant to indicate what an investor might receive, per share, if the company’s assets were sold at the values recorded in its financial statements. Analysts calculate book value (and you can, too) by subtracting preferred equity from shareholder’s equity and dividing by the number of shares outstanding.
Q: IS DETERMINING BOOK VALUE A GOOD TOOL FOR INVESTORS?
A:Value managers do analyze companies to find stocks selling near or below book value. If a company’s stock is selling at less than book value, it’s a real value and perhaps a good buy. The flip side is that companies rarely close their doors, sell out, and distribute cash. So book value alone may not be particularly useful for investors. You really want to buy companies that are ongoing operations, that will make money over time — not those that will close and liquidate.