Book Value

Book value has two accounting meanings. Book value is the value of an asset on a balance sheet, which is the cost of the asset minus accumulated depreciation. Book value also means the net asset value of a company. This book value is calculated by adding all the assets of a firm and subtracting intangible assets and liabilities. A value investor compares a company’s book value to its market capitalization to determine whether its stock is undervalued. A growth investor tends to believe a company is more valuable than its book value suggests, given the expectation of growing profits. Capital-intensive industries usually have higher book value than high-tech industries. Corporate raiders in the 1980s scrutinized book value in numerous U.S. companies. They found companies whose market capitalization was lower than their book value, then purchased shares of stock in those companies. When they gained a controlling share, the raiders frequently sold off the assets of the companies they took over.