Book Value

By May 24, 2019April 14th, 2023No Comments

What is Book Value?

Book Value has two definitions based on the term usage.

First, Book Value is the value of anything appearing on the Balance Sheet. Traditionally, companies record their assets, liabilities and equity in a book. Therefore, the value of these items as recorded in their books is known as “Book Value”. When someone says the “Book Value of XYZ”, it means the value of XYZ on the Balance Sheet. So for example, the “Book Value of Intangible Assets” is the value of Intangible Assets on the Balance Sheet. The “Book Value of PP&E” is the value of PP&E on the Balance Sheet. This definition is based on the usage that specifies a particular item.

Second, Book Value is the value of Shareholder’s Equity on the Balance Sheet. It is one of several metrics that measure the value of the company entitled to equity investors. For reasons we’ll elaborate below, Book Value is a poor way to measure the value entitled to equity investors. When people use the term without specifying any particular item, they’re likely talking about the “Book Value of equity”. As an example, suppose someone says “The book value of the company is $300 million.” They are saying that the value of Shareholder’s Equity on the Balance Sheet is $300 million. This definition is based on the usage that does not specify any particular item.

Either way, Book Value refers to a value on the Balance Sheet. It can refer to any item on the Balance Sheet, or it can refer specifically to Shareholder’s Equity.

Because the first definition is pretty self-explanatory, we’ll focus the explanation of Book Value on the second definition. In other words, when we say “Book Value” in this article, we mean the value of “Shareholder’s Equity”.

Book Value Formula

There are two main ways to calculate Book Value (under the Shareholder’s Equity definition).

The first way uses the Accounting Equation. Recall that there are three sections on the Balance Sheet: Assets, Liabilities and Shareholder’s Equity. The Accounting Equation stipulates that Assets minus Liabilities must equal Shareholder’s Equity. Therefore, if we subtract Liabilities from Assets, it will give us the company’s Book Value.

Book Value Formula

The second way adds up all the individual components that make up Shareholder’s Equity (Book Value). Recall that Shareholder’s Equity is a section on the Balance Sheet. Within this section, there are individual line items that eventually add up to the section total. Naturally, another way to calculate the Book Value is to add up these individual line items. For most companies, the line items under the Shareholder’s Equity section are Common Stock Par Value, Additional Paid-In Capital, Retained Earnings, Accumulated Other Comprehensive Income and Treasury Stock. When we say you “add up” these numbers, we mean that you use the addition function. However, some of these numbers can appear in negative form. For example, Treasury Stock appears in negative form. By “adding” Treasury Stock, which is a negative number, you’re essentially subtracting it. Likewise, a negative Retained Earnings is known as Accumulated Deficit. By “adding” Accumulated Deficit, which is a negative number, you’re really subtracting it. Add up all these number and that gives us the company’s Book Value.

Book Value Example

Let’s take a look at an example of Book Value using Apple, Inc. Please take a look at its FY2022 Balance Sheet (Page 31).

Using the first way, we see that Apple reported Total Assets of $352,755 million and Total Liabilities of $302,083 million. The difference between the two equals Book Value of $50,672 million.

Using the second way, we see that Apple reported Common Stock Par Value and APIC of $64,849 million, Accumulated Deficit of negative $3,068 million, and Accumulated Other Comprehensive Loss of $11,109 million. The sum of these numbers equals Book Value of $50,672 million.

Frankly, for public companies, this isn’t a number you’ll need to calculate. Why? Because they report the Book Value explicitly on the Balance Sheet. In Apple’s Shareholder’s Equity section, you can see clearly that the company explicitly states that it has a Shareholder’s Equity of $50,672 million.

Book Value Example Apple

Book vs. Market

Book Value and Market Value are two different metrics used to measure a company’s value. Book Value is the value of a company’s assets minus its liabilities, as reported on its Balance Sheet. Market Value, on the other hand, is the price at which a company’s stock is currently trading in the stock market.

Book Value provides an estimate of what the company would be worth if all its assets were sold and all its debts were paid off. Book Value is calculated using historical cost accounting methods, which means that the value of the company’s assets is based on the original purchase price, adjusted for depreciation.

Market Value, on the other hand, is a reflection of the current market demand for the company’s stock. It is influenced by a variety of factors such as investor sentiment, industry trends, and the company’s future growth potential. Market Value is determined by the supply and demand for the company’s shares in the stock market, and is constantly changing as investors buy and sell shares.

One major difference between Book Value and Market Value is that market value takes into account future growth potential, while Book Value does not. Market Value reflects the market’s expectations for a company’s future earnings, growth prospects, and other factors that can affect its stock price. Book Value, on the other hand, is based solely on the company’s historical financial statements and does not consider future growth potential.

In general, Market Value is considered a more important metric for investors than Book Value. That’s because the former reflects market demand for the stock and growth potential. However, Book Value can be useful in identifying undervalued companies, and is often used in conjunction with other metrics and analysis to evaluate a company’s overall value and investment potential.

Book vs. Intrinsic

Book Value and Intrinsic Value are also two completely different concepts.

Book Value is the value of a company’s assets minus its liabilities, as reported on its Balance Sheet. It measures the amount of money leftover to equity holders based on historical accounting records.

Intrinsic Value, on the other hand, is an estimate of the true or fair value of the equity, based on the company’s future earnings potential independent of what price (Market Value) the company’s stock is trading at in the stock market. Intrinsic Value takes into account qualitative factors such as the company’s management team, brand strength, and competitive position, as well as quantitative factors such as earnings, cash flow, and financial ratios.

Intrinsic Value is a subjective estimate that can vary depending on the analyst’s assumptions and methodology. It is often calculated using Discounted Cash Flow (DCF) analysis, which estimates the present value of the company’s future cash flows.

While Book Value is based on historical accounting principles, Intrinsic Value is forward-looking and based on future expectations. Intrinsic Value can be higher or lower than Book Value, depending on the company’s growth prospects and other factors.

In general, Intrinsic Value is considered a more important metric for investors than Book Value. That’s because it provides a more complete picture of a company’s potential value and investment potential. However, Book Value can be useful in identifying undervalued companies and as a starting point for further analysis.

Why is It Called “Book Value”?

Back in the day, companies maintained their accounting records by paper and pen. As you can imagine, that results in a heavy stack of papers that appear like books. Therefore, people often refer the practice of keeping accounting records as “keeping books”.

Because Book Value is the amount recorded in these accounting records (“books”), people coined the term “Book Value”.

Can Book Value Be Negative?

Yes, Book Value can be negative. In fact, a lot of companies have negative Book Value. It’s not necessarily a bad thing. Conceptually, Book Value can be negative for two types of companies. Whether negative Book Value is good or bad depends on which type the company is.

The first type of company that has negative Book Value is money-losing companies. These companies have lost so much money that Retained Earnings (Accumulated Deficit) is heavily negative. This causes the overall Shareholder’s Equity to turn negative.

The second type of company that has negative Book Value is companies that returned a lot of capital to shareholders. These companies have used way more cash for dividends and share repurchases that Shareholder’s Equity turns negative.

In short, Book Value can absolutely be negative. And it’s not necessarily a bad thing.

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