Book value is the value of the company’s assets which can be received by the shareholders in the event of company liquidating itself or going bankrupt. Thus its the value a shareholder receives for his shareholding in the company after paying off all the liabilities (debt, borrowings and payables) and preference holders in the event of liquidation. Thus it’s a true value of a Business. Positive book value means that the assets are more than the liabilities and vice a versa. If book value is negative, that means the company will go in for insolvency proceedings. Balance Sheet gives a true worth or net worth of a company popularly known as Book Value or Shareholders Equity.
Book value is a company’s net asset value. At the time of liquidation of a company, the book value indicates the amount each shareholder will receive after all assets are liquidated and all the liabilities are cleared. This ratio is used by investors to determine whether a stock price is undervalued or overvalued. If the price to book value per share is less than one, it means that the stock is trading below its book value. If a business can increase its Book Value per share, investors may view the stock as more valuable, and the stock price may increase further. Book value is majorly arrived at taking into account historical prices of assets thus market value should be the best judge for any investment or liquidation decision. Market value takes into account the future growth prospects of the company.
If the company goes in for buybacks or open offer then the book value of the share decreases. This increase or decrease happens due to change in Total Outstanding shares. Again if the Total Assets increases or liabilities reduces then also the Book Value increases and if the Investments a part of Assets are sold off or debt is increased in the liabilities section then the Book Value Decreases.
The book value per share of different companies from different sectors cannot be compared since it shows a major variation. Hence the formula is restricted to different companies in the same sector. If we compare between sectors it will show a major aberration. Secondly, the Assets under management are not valued at market price in the balance sheet and thus represents the value at the time of its purchase and also the depreciation shown can be more than what is actually shown.
Book Value per share = Shareholders Equity or (Total Assets-Total Liabilities) – Preferred Equity/
Total Outstanding Shares
Suppose a company’s total assets is Rs12 crores and liabilities is Rs2 crores, its preferred Equity is Rs3 crores and the total outstanding shares are 3.5 crores, then its book value per share = (12-2)-3/3.5= Rs 2
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