Book value, or net book value is used to indicate how much a company would be worth if it discontinued operations immediately, sold off its assets and paid off all of its debts. It is calculated by subtracting liabilities from tangible assets. For instance, a printing company owns $150,000 in real estate, supplies, delivery trucks and printing equipment. It also has $50,00 in cash and $50,000 invested in other company’s stocks. These tangible assets add up to $250,000. The printing company also owes a debt of $50,000 in business loans. Thus, the company’s book value is $200,000. When calculating book value, intangible assets such as intellectual property, patents and goodwill are not included.
Book value is useful to investors in two main ways. First, it tells an investor in theory how much shareholders would potentially received if the company immediately liquidated. Second, a company’s book value can be compared to its market value in order to determine if a stock is over- or under- priced.
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