What is Book Value?
The book value, or net tangible assets, of a company refers to liquidation value of their assets if they were forced to sell everything. The book value of a company can be derived through the balance sheet by using the following formula:
Assets - Liabilities - Intangible Items (Patents, Trademarks, Goodwill, etc.) - Preferred Stock
Subtracting intangible assets is what differentiates book value from shareholders equity; it represents the true cash value of liquid, tangible assets of the company. You may ask then, why is the stock worth more than book value? Book value is only one component of stock price; others include earnings estimates, intangible items, and investor sentiment (as we have seen in the crash of 2008 where hedge funds deleveraged their portfolios by selling securities at any cost). When markets become fearful, bargains will present themselves; however, a bargain may be there for a reason. Always understand the fundamentals of the company; a couple key gauges to look at are price/earnings ratio, EPS, return on invested capital, and many of the other important financial ratios.
Book Value of Assets
In accounting, the term book value refers to the value of an asset carried on the balance sheet. In this context, the book value is equal to the acquisition cost of the asset minus any depreciation or amortization that has been taken on the asset. The book value of an asset will decrease over time until it the end of its useful life.