When dealing with stocks, analysts often will want to know the book value of the common stock. Essentially, the book value has to do with the calculated worth of the company’s common stock as of the most recent balance sheet. There are several elements that go into calculating the current book value which make the information necessary in a number of different applications.
The initial book value of any asset is either the cash value of the asset, or the acquisition cost. Cash assets, of course, are not subject to depreciation. Buildings, land, and operating equipment would tend to be valued based on the acquisition cost initial, with the understanding that the total cost of acquisition includes both the purchase price and any other expenses associated with the acquisition, such as broker fees or other types of processing fees.
Over time, there are factors that will impact that initial book value. Depreciation of some assets will mean that the actual cash value may temporarily be lower than the acquisition cost. Amortization and depletion will also play role in determining the posted book value of both the individual assets and the total assets of a company. As different factors influence the actual book value from one period to the next, the change will be reflected on the balance sheet covering each period. This helps to ensure that value investors can always have access to the latest status of the book value of the assets.
While the use of the term book value is common in many countries, the process is sometimes referred to as the net asset value. This is in recognition that book value is generally represented as the shareholder’s equity in the company, since the equity has to do with the claim of the shareholders on the assets of the company, minus any outstanding liabilities.
In cases where a company is about to be liquidated, and the assets sold off, the book value becomes the focal point for paying off current shareholders. In essence, the book value, which takes into consideration the worth of current liabilities held by the company, ensures that persons who currently own stock in the company will receive payment for each share that is equal to the worth that is shown on the final balance sheet.
