Book Value –
Book value is the value of company’s value according to its balance sheet. BV can be calculate by substracting total liabilities from total assets.
Book Value = Total Assets – Total Liabilities
The best way to understand this term is very simple, book value is useful to understand that how much cash the company would have left if it stops its operations.
BV is very important for a value investor. It is useful to find out undervalued and overvalued stocks.
- Undervalued Stocks – If the market price of stock is lower than BV then we can say that the stock is undervalued.
- Overvalued stocks – If the market price of stock is higher than BV then we can say that the stock is overvalued.
Let’s take an example of company A, If the total assets are Rs 150cr and its total liabilities are Rs 50cr then the BV of company A is
BV of company A = Total Assets – Total Liabilities
BV of company A = 150cr – 50cr
BV of company A = Rs 100cr
This BV of company A Rs 100cr means if company liquidates today, this Rs 100cr will get credited to equity holders accounts.