How to use the book value to get your hands on a bargain stock

Julie Brownlee, Fsp Invest, 28 Sep. 2015

Tags: book value, what is book value, how to calculate book value, how to find cheap stocks, tangible book value



The lower the price you pay for a share, the higher your potential profits are.

So how can you find out if a stock is trading at a low price?

One thing you can do is look at a company’s book value…



What is a company’s book value?


A company’s book value is also known as its net asset value (NAV), equity or shareholders’ funds.

The book value is the value of all of a company’s assets minus all of its liabilities (debts).

You can find a company’s book value in the balance sheet of its annual report.

You can use the book value to estimate what a company would be worth if you sold all its assets at their balance sheet values. It’s a common way to value stocks like banks, house builders and insurance companies.


The problems using a company’s book value


One issue with using the book value is if a company has a lot of intangible assets, such as goodwill. An example of goodwill is the value of a brand, which is hard to measure the monetary value of.

The intangible assets may not have any value or the level of value a company places on them.

To deal with this, you can remove the value of intangible assets from a company’s book value to give you the tangible book value. This only includes hard assets like cash, stocks, buildings, property, land, etc.


How to use the book value to check if a stock’s undervalued


If you calculate a company’s tangible book value and divide it by the number of shares in circulation, you get the tangible book value per share.

If you find that a share is trading for far less than its tangible book value, you may have found yourself a cheap stock.

So there you have it. How to use the book value to get your hands on a bargain stock.

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