Book Value of a company is the value of its shares based on the company’s balance sheet. It includes tangible assets, but excludes depreciation, debt, goodwill and other intangible assets. Book value per share is a measure often used by investors to determine the level of safety associated with a stock investment.
Calculation of Book Value
Book Value is calculated as the total value of assets minus intangible assets, depreciation and debt or Book value is also the sum of the company’s tangible assets and reserves.
Use of Book Value in Stock Valuation
The price-to-book ratio is the most common valuation method using book value. It divides the stock price of a company by the book value per share. The price-to-book ratio is used in asset-based companies such as banks and mining companies. However, the valuation of manpower-heavy companies, such as information technology and research firms, may represent a skewed picture of as these are asset-light companies and earning would be a more appropriate measure of valuation.