Book Value: What does it Mean?

• In regards to accounting, book value is the value of an asset according to its balance sheet. In terms of assets, the value is based on the original cost of the asset minus ant amortization, impairment costs, or depreciation on the asset. Most commonly, a company’s book value will be its total assets minus all liabilities and intangible assets. In practice; however, depending on the calculation, a book value may include intangible assets or goodwill. When these variables are excluded, the accounting term is often specified as a “tangible book value.”

• An asset’s initial book value will be its acquisition cost or its actual cash value. Over time, this book value will decrease due to the presence of depreciation, depletion and amortization. Depreciation is used to take note of the declining value of tangible assets (cars, buildings etc.) over time; amortization is used to record the declining value of intangible assets, such as patents; and depletion is used to record the consumption of the natural resources, which complement or are needed to sustain the attached asset. 

• A company’s book value, which is regarded as an asset held by a separate entity, is the company’s shareholders’ equity, the market value of the shares owned by a separate entity or the acquisition cost of the underlying shares. 

• A corporation’s book value is used as an analytical tool to help determine whether the market value of shares is above or below the book value. That being said, both measures (book value and market value) are somewhat biased; the underlying corporation’s accounting records will typically not reflect the market value of the entity’s assets and liabilities and the market value of the corporation’s stock is subject to wide fluctuations. 

• Book value is may be used as a valuation metric to set the floor for stock prices under worst-case scenarios. For instance, when a company is liquidated, the book value is the figure left over to signify all debts owed. Furthermore, book value per share is also used to generate a measure of earnings for companies.