Book value of a share

What is ‘Book value’ of a share?

Book value of the company is the value of an asset according to the balance sheet.  In other words this is the value of the only tangible assets. That means total assets minus intangible assets.

In terms of personal finance current market price minus book value is the capital gain of an asset or company.  Usually fundamental analysts and long term investors prefer this value to know under valued stocks.  Always high returns follows high risks.

Essentially this is the base parameter to calculate the price to book ratio.  Price to book ratio usually reoffered by ‘P/E’.  If price to book ratio is in between 3 to 5 it is a good opportunity for long term investment.  If it is less than 3 something is going on with it’s management.  Finally if it is more than 5 it can lose it’s market price at any time or it is the over priced stock.

This is also know as “net asset value” in UK, and “net book value”.  This value won’t change frequently it will change if underlaying value of an asset.

During the dividend pay out book price will decrees. As well as it will decrees when company buy back it’s own shares.  Profit and losses also affect book price accordingly.

Usually all the websites and mobile applications show this essential value for each and every company.  Optimistic investors newer miss to have a look into this value.

Formula for book price

Book price=Total assets – ( Total liabilities + Total Intangibles assets )

Example

Consider a company with total assets ₹10,000, total liabilities 1,000 along with 3000 of intangible assets.

Therefore book price = 10,000 – ( 1,000 + 3000)

book price = 6000

Main uses

  • This is the theoretical value of the assets shareholders receive, during the liquidation.
  • This can be used to analyse market value of a company is over or under priced.

 

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