BOOK VALUE of any company represents the actual value of the company on its book (i.e account book). This can also be understood in other way that it is the value of each share of a company, after all its assets are sold for cash and all the liabilities are paid off. To understand it better lets first understand the Shareholder’s Equity.
SHAREHOLDER EQUITY: it is the retained earnings from the prior (last) year + net income of the year at hand (revenues expenses) – dividend paid during the year at bond +share capital. It is also defined as,
Shareholder’s Equity= Total assets – Total Liability
Now book value of a company is defined as Shareholder’s Equity divided by the Nos of Outstanding shares.
Book Value Formula,
We find or calculate Book value of a company to actually compare it by its share value i.e CMP (Current Market Price). So that we can judge whether we are able to buy the business for less than what its assets are worth (after deducting liabilities). This is also expressed as the ratio of Price to Book. A P/B ratio of less than 1 is always better.
What is Price to Earning Ratio (PE) ??