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Understanding Book Value
Understanding Book Value
How much is a company worth and is that value reflected in the stock price?
There are several ways to define a company’s worth or value. One of the ways you define value is market capital or how much money would you need to buy every single share of stock at the current price.
Another way to determine a company’s value is to go to the balance statement and look at the Book Value.
The Book Value is simply the company’s assets minus its liabilities. Every quarter the company declares the result and in that you can find the book value.
Book Value = Assets - Liabilities
In other words, if the company gets closed then how much would be left after settled all the outstanding obligations and sold off all the assets and how much the investors would get minimum amount.
A company that is a viable growing business will always be worth more than its book value for its ability to generate earnings and growth.
Book value appeals more to value investors who look at the relationship to the stock's price by using the Price to Book ratio.
To compare companies, you should convert to book value per share, which is simply the book value divided by outstanding shares.