Investing 101: Getting to grips with a company’s book value

Julie Brownlee, Fsp Invest, 18 Aug. 2014

Tags: book value, what is book value, african bank book value, how to use book value, buying undervalued shares,

As the rescue of African Bank gets well underway, if you’ve read anything in the financial press about the process, you’ll have seen the term ‘book value’.

In African Bank’s case, the rescue plan involves splitting the ‘good’ bank (with a book value of R26 billion) from the ‘bad’ bank (with a book value of –R17 billion).

So what does book value mean?

Read on to find out…

What is a company’s book value?

Book value is the value of all a company’s assets, minus all of its liabilities. It’s a measure investors often use to try to value a company.

If you’re looking for a company’s book value, you’ll find it in its latest financial statements on the balance sheet. It will be under the term ‘net assets’ or ‘shareholders’ funds’

If an analyst or investor wants to work out how much a company would be worth if it sold off all its assets, this is the figure they use.

It’s a common measure for valuing banks and house building companies.

How to use a company’s book value

Some analysts use a company’s book value to try to unearth undervalued shares.

For instance, if you could buy a company’s shares for less than its book value. This means the company’s price to book ratio would be less than 1.

So you could buy the company, sell its assets and still make money.

What to watch with book value

In some cases a company’s book value also includes its intangible assets.

Intangible assets are things like the value of a brand. It’s hard to put a value on things like this. These intangible assets may not be worth as much as the company and its accountants believe.

If you want to ensure you’re getting a truer picture of a company’s value, minus a company’s intangible assets from its book value. The resulting figure is what the hard assets of the company are worth. For example, cash, machinery and property.

So there you have it, what a company’s book value is.

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