2. Book Value (BV):
Book Value = (Equity +Reserves) Networth of the company / Outstanding number of shares
Book Value of a company is the net-worth of the company. To compute book value per share, net-worth of the company is divided by the number of outstanding shares. In simple terms, book value per share means the theoretical amount of money each share would get in case the company was to wind up.
Mind you – On left hand side of a balance sheet, there are primarily two things – share capital and debt. The assets of the company are listed in the balance sheet at its book value, i.e. cost less depreciation. The realisable value of these assets may be different from book value and is never known with certainty. If it is assumed that each asset on the Balance Sheet may be converted into cash at its book value, then after fully honouring the business liabilities, cash equivalent to net-worth (equity plus reserves) would be left for shareholders. The ability of the company to meet its liabilities would depend upon the realisable value of its assets.
Example:
In the general – An Automobile cost may be INR 1,00,000 when it was bought. Accumulated Depreciation on Automobile, may be INR 60,000. The net of those two amounts (INR 1,00,000 minus INR 60,000) is the book value or the carrying value of the automobile. In this example the INR 40,000 is the amount being reported on the company’s books. You must note that depreciation is not a realisable value but a notional value.
How to Analyse:
It is a helpful tool for investors wanting to determine if a company is underpriced or overpriced, which could indicate a potential time to buy or sell. For instance, value investors search for companies trading for prices at or below book value (indicating a price-to-book ratio of less than 1.0), which implies the shares are selling for less than the company’s actual worth.
