Book value is the value of a company or an asset calculated by looking at is balance sheet. Since the balance sheets are also known as the “books” of a company, the value thus determined is called the book value. Book value for a company is calculated by subtracting impairments, amortization and depreciation costs, as well as liabilities, from the original cost of acquiring that company. Book value, also known as carrying value, does not take into account the value of intangible assets such as the goodwill, or brand recognition, associated with a company.
Book value is one of the important metrics used to calculate the suitability of an asset for investment. However, since it does not include the value associated with the intangible assets of a company, book value for many reputed companies is often lesser than their actual value. For this reason there are different types of book values to measure the value of an asset more accurately. The following are some of the more useful types:
- Adjusted Book Value
Adjusted book value is calculated for companies that are distressed or facing a sale. By appraising its assets using their current market value, a more accurate estimate of the company’s value can be calculated. This is called the Adjusted Book Value. If done correctly, this is the value that would be received if the asset were put for sale.
- Tangible Book Value
Under some definitions, book value may include the value of intangibles such as goodwill associated with a company or asset. If intangibles are explicitly excluded from the calculation, as they are often done, then it is termed Tangible Book Value.
- Economic Book Value
This is a form of adjustable book value that also considers the value of intangibles such as goodwill in calculating the total value of an asset.
- Net Asset Value or Net Book Value
Net Book Value is another common name for book value. Similarly, book value is more commonly known as Net Asset Value in the United Kingdom.
Book value of a company or asset is an important metric that is used to decide about its suitability for investment. This is especially true for an investor who uses fundamental analysis to decide where to invest his or her money. By using one or the other type of book value, you can determine whether a company is accurately priced in the market or not; if it is not, investing in it is more likely to yield results than investing in a company that is valued more accurately.