Book value
Key Takeaways
- Book value is the difference between the company’s total assets and the company’s outstanding liabilities.
- Book value = Total assets – Intangible assets – Liabilities.
- Book value is equal to carrying value of assets on the balance sheet.
The book value is the value of an asset after accounting for its depreciation on the acquisition price consisting of the purchase price and the installation price of the asset.
What Is book Value?
Book value is the difference between the company’s total assets and the company’s outstanding liabilities, which is equal to carrying value of assets on the balance sheet. Many investors use this tool to obtain value for the company.
How do you calculate book value?
The book value of an entire firm/enterprise/company can be calculated using the following formula:-
Book value = Total assets – Intangible assets – Liabilities.
For example, a Horizon company has total assets of Rs.20,00,000 and intangible assets worth Rs.5,00,000 and liabilities worth Rs.4,00,000.
The book value of the Horizon company would be Rs.20,000,000 – Rs.5,00,000 – $4,00,000 = Rs.11,00,000.
Rs.11,00,000 is the net worth of the Horizon company.
Book Value vs. Market Value
Book value is obtained by deducting the total liabilities of the company from the total assets of the company. The market value is nothing but the current price of the asset in an open market. Book value is based on the company’s historical financial results. Investors use the company’s latest balance sheet to calculate the book value. Market value or economic value depends on the expectations of investors for the future. Investors look at a company’s performance profitability, productivity, and business management before investing in it. The discrepancy between the market value and book value is because the market price is the price at which an asset was sold, and the net book value is the cost of goods sold.