Finding book value depends on what you are trying to value – an individual asset, an entire company, or a company's value per share. The term "book value" essentially represents the historical cost of something minus accumulated depreciation or liabilities, as recorded on a company's financial statements (the "books").
Here are the different ways to calculate book value based on what you are measuring:
Book Value of an Asset
The book value of a specific asset, such as a piece of equipment or a building, reflects its value on the company's balance sheet.
According to the references:
Book value of an asset = total cost - accumulated depreciation.
- Total Cost: This is the original purchase price of the asset, plus any costs necessary to get it ready for use (like installation or shipping).
- Accumulated Depreciation: This is the total amount of the asset's cost that has been expensed over time to reflect its wear and tear or obsolescence.
Example: If a company bought a machine for $50,000 and has recorded $20,000 in accumulated depreciation against it, the asset's book value is:
$50,000 (Total Cost) - $20,000 (Accumulated Depreciation) = $30,000
This value decreases over the asset's useful life as more depreciation is recorded.
Book Value of a Company
The book value of an entire company, sometimes referred to as its net book value or book value equity, represents the value of the company's assets after all its liabilities are paid off. This is a common metric used by investors.
Based on the references:
Book value of a company = assets - total liabilities.
- Assets: These are everything the company owns that has value (cash, accounts receivable, inventory, property, equipment, etc.).
- Total Liabilities: These are all the company's financial obligations to outside parties (accounts payable, loans, bonds, etc.).
This calculation essentially equals the shareholders' equity on the balance sheet. It represents the theoretical amount that would be left for the shareholders if the company sold all its assets and paid off all its debts.
Example: If a company has $1,000,000 in total assets and $400,000 in total liabilities, the company's book value is:
$1,000,000 (Assets) - $400,000 (Total Liabilities) = $600,000
Book Value Per Share (BVPS)
Book value per share indicates the book value of the company attributable to each outstanding share of common stock. It provides a per-share metric for investors to compare against the market price per share.
The references define it as:
Book value per share (BVPS) = (shareholders' equity - preferred stock) / average shares outstanding.
- Shareholders' Equity: This is the residual interest in the assets of the entity after deducting liabilities. It is also equal to "Assets - Total Liabilities" as mentioned above for the company book value (assuming no preferred stock).
- Preferred Stock: The value of preferred stock is subtracted because these shareholders typically have a higher claim on the company's assets than common shareholders in the event of liquidation.
- Average Shares Outstanding: This is the average number of common shares held by investors during the period.
Example: If a company has shareholders' equity of $600,000, preferred stock valued at $100,000, and 100,000 average shares outstanding, the BVPS is:
($600,000 (Shareholders' Equity) - $100,000 (Preferred Stock)) / 100,000 (Average Shares Outstanding) = $500,000 / 100,000 = $5.00 per share
Here is a summary table based on the formulas:
| Type of Book Value | Calculation | Represents |
|---|---|---|
| Asset | Total Cost - Accumulated Depreciation | Value of a specific asset on the balance sheet. |
| Company | Assets - Total Liabilities | Value of the company after paying off all debts (Shareholders' Equity). |
| Per Share (BVPS) | (Shareholders' Equity - Preferred Stock) / Average Shares Outstanding | Book value attributable to each common share. |
Understanding which type of book value is being referred to is crucial when analyzing financial statements or evaluating investments.
