book value
The net value of a company's assets minus its liabilities, as recorded on the balance sheet. Also called net asset value or shareholders' equity.
Example
“If a company has $10M in assets and $4M in liabilities, its book value is $6M.”
Memory Tip
Book value = what the BOOKS (balance sheet) say the company is worth.
Why It Matters
Book value helps you understand what a company would theoretically be worth if it liquidated all its assets and paid off all its debts today. This metric is important when evaluating whether a stock is undervalued or overvalued compared to its actual net worth.
Common Misconception
Many people assume book value equals what a company is actually worth on the market, but market value can be dramatically different because it includes investor expectations about future profits and growth that are not reflected on the balance sheet.
In Practice
Suppose a manufacturing company has total assets of 500 million dollars and total liabilities of 200 million dollars, giving it a book value of 300 million dollars. If the company has 10 million shares outstanding, the book value per share would be 30 dollars, which investors can compare to the current stock price to assess if the stock is trading above or below its accounting value.
Etymology
From the 'books' (accounting records) of a company — literally the value recorded in the accounting books.
Common Misspellings
Small business accounting made simple
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