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Book Value Book value is the calculated dollar per share value of a company. To calculate book value, subtract liabilities from assets, then divide by total number of outstanding shares. Book value has several important limitations that investors need to understand, the following is a brief description of these limitations.
When using book value, companies should only be compared to others in the same industry. The ratio is influenced by the following factors which cause this limitation. First, certain businesses have different asset bases from which they run their business (e.g. a car manufacturer versus Google). Secondly, the size of the company changes the ratio since larger companies have more outstanding shares than do smaller ones. Book values can also be inaccurate or misleading because they do not reflect changes in market valuations, inflation, appreciation/depreciation (only recognized when sold), total costs of repayment of liabilities, different accounting practices or methods or others. Even with these limitations, in general, there has been a long term correlation between book values and stock prices. |
