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.
