Net Book Value - Explained
What is Net Book Value?
Written by J. Mance Gordon
Updated at April 18th, 2024
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What is Net Book Value?
In accounting, the book value of an asset is its written down value in the balance sheet after deducting the accumulated depreciation from its purchase cost.
The book value of a company is the net worth of the company calculated by deducting the company's outstanding liabilities and intangible assets from the total value of the company's assets.
How is the Net Book Value Used?
The book value of a firm is important to calculate the book value of its shares. The book value of the shares is calculated by dividing the book value of the firm by the number of shares held by the shareholders. It is the value the shareholders would theoretically receive for each share if all the assets of the company liquidate. This value can be used for comparing it with the market value of the company to estimate whether the stocks are overpriced or underpriced. In the United Kingdom, the book value is known as the net asset value. The same is also known as the net book value. The name book value came from the accounting practice of recording that value in the book or balance sheet. The book value of an asset may stay constant over the time, but the collective book value of the company may increase by accumulating the earnings generated through asset use. Comparing book value with the market value of the shares is an effective technique to evaluate the pricing of the shares. When mark-to-market valuation is not applied to the assets whose value may increase or decrease with time, this method may not work accurately. If the companies follow the uniform method of accounting, the price-to-book ratio can be useful for value comparison between the companies operating in the same industry. This method will fail if the companies belong to different industries as companies operating in certain sectors record their assets as historical cost while in other sectors, they mark their assets to market. So, a high price-to-book ratio doesn't necessarily indicate a premium valuation and a low price-to-book ratio doesn't signify a discount valuation.