Book Value (Company) - Explained
What is the Book Value of a Company?
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Table of ContentsWhat is the Book Value of a Company?How is the Book Value of a Company Used? What is the Book Value Per Common Share?How is Book Value Per Share Used? The Difference Between Market Value per Share and Book Value per Share
What is the Book Value of a Company?
The Book Value of a company simply refers to the value of a company after its assets have been liquidated and its liabilities paid. A company's balance sheet contains the firm's net asset value. This is an estimate of a company's worth as the difference between the value of tangible assets and liabilities. Hence, book value can be viewed in relation to a company's stock value after taking liabilities into consideration.
Back to: ACCOUNTING, TAX, & REPORTING
How is the Book Value of a Company Used?
Book value means the accounting value of a firm that pictures the worth of a firm after it has been liquidated or the stock value of a firm when compared to the general market value. Book value can also be referred to net book value or net asset value. This term is also applicable in personal finance as it reflects the price paid for a debt or security by an investor. Book value is an accounting practice that records the asset value and accumulated earnings and depreciation of a company resulting from asset use. It also represents the amount shareholders would receive (shareholders worth) if a company were liquidated. Book value is also an accounting value that reflects whether a company's stock is underpriced or overpriced. Book value can be a substitute shareholders interest or market worth. It is also useful in the comparison of the stock values of similar companies. It exemplifies their decrease or increase in shares worth or market value in a fair market. However, it might be difficult to use book value when comparing firms from different industries because of the difficulty in coming up with a comparable valuation.
What is the Book Value Per Common Share?
Book value per common share refers to a technique or formula that the company uses to calculate its per share value concerning ordinary shareholders` equity in the company. In case of dissolution of the company, the book value per common share refers to the remaining amount to be shared by the common shareholders after the liquidation of all assets and payment of all debts.
How is Book Value Per Share Used?
The book value per common share is a historical accounting measure that uses the formula below to determine the value of the shareholders in the company. The measure is given by; Book Value Per Share = (Ordinary Shareholder Equity - Preferred Equity) / Total Outstanding shares. The numerator figure shows the original amount received by the company after issuing ordinary equity shares which can either increase when the company make profits or decrease when the company make losses or pay out dividends. When the company repurchase its stocks from the market, the total common share counts and the book value decreases. When repurchasing the stocks, the company uses the current market price which has considerable impacts on the book value per common share amount. In most cases, stock repurchase reduces the book value per common shares. On the other hand, the figures used in the denominator are the average number of diluted common shares in the previous year. This considers any additional shares above the basic the basic share count that arise from warrants, preferred shares, stock options, and other convertible instruments.
The Difference Between Market Value per Share and Book Value per Share
In company finance, market value per share and book value per share has several differences. One of the key differences lies in their definitions. The market value per share refers to the current stock price of the company shares; it shows values that the participants in the market are willing to pay for the ordinary shares. On the other hand, the book value per share refers to the differences between the company assets and liabilities. Secondly, the book value per share determined using historical cost technique. On the other hand, the market value per share is calculated using a forward-looking technique that takes into considerations the future earning power of the company. Besides, the difference also arises based on their classification of the transactions provided by the accounting principles and standards. Increase in the company estimated growth, profitability, and safety results into increase in the market value per share. However, it does not have significant effects on the book value per share. The accounting principles used by the company has a significant impact on the book value per share. For example, the American generally accepted accounting principle provides that marketing cost should be expensed thus reducing the book value per share.
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