Book value is important such that shareholders will receive that much amount per share if a company is liquidated as on date.
Book value is the total amount of company’s physical assets ( excluding patents, goodwill) minus liabilities. So in absolute terms, book value is the net assets of the company.
Indian stock market the book value is per share value i.e. total book value divided by the number of shares.
Why book value is important?
Book value is important such that shareholders will receive that much amount per share if a company is liquidated as on date.
Note (As suggested by Ramamurthy): If actually company is liquidated shareholders may receive the amount on actual as recovered from selling the assets which may not be sold on the price intended or the price in books and balance sheet.
Note II: Small investors are the last in the process of receiving the amount after debtors and major share holders. So never rely too much on the process of liquidation. Just understanding it is more important than actually executing it.
Book value and share price
Any stock’s available at a price lower than book value is available at a discount and any stock available at a price higher than book value is available at a premium to books. Note than discounted price and premium price is based only on asset value and not from a business point of view.
Example
Company XYZ has a book value of Rs 100. It means if the company XYZ is out of business and is liquidated today will leave Rs 100 to all its share holder. Still it can be trading in the market at Rs 70 (discount to book value) or at Rs 140 (premium to book value) depending on the growth the business can achieve in future.
Discounted price means company XYZ has built great assets over time but they possibly are not able to generate the kind of income needed to justify the book value.
Premium price means company XYZ has built a great business that is allowing their book value to expand and so is trading at a premium.
- Tata Steel consolidated book value is Rs 322.79 but is being traded around 237 Rs. Available at a discounted price to books.*
- Reliance Industries consolidated book value is Rs 739.48 and is being traded around 960 Rs. Available at a premium to books.*
- Asian Paints consolidated book value is Rs 49.44 and is being trade around 890 Rs. Available at a huge premium to books.*
*All data are from Moneycontrol and book value is for the year March 2015.
FAQs
Can book value be negative?
Yes. It means they have more liabilities than assets.
If you have any other questions for book value, ask them in comments below and will be more than happy to answer them all.
If the book value of share is less than CMP then what it indicates
It only means the share price is trading at a discount to the book value. It can be that there is some fear in the market and so it is trading at a discount to the book value.
Some stocks have minus book value so what we can understand from that?
They are easily identified as stocks to avoid.
Thanks..
Can you please prefer me to invest some gud penny stock for long term..
I don’t I believe in: Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.
So I share how to fish for good stocks and so you can start by reading my following articles
https://shabbir.in/investment-checklist/
and
https://shabbir.in/fundamental-analysis/
Book Value is a theoretical number derived from netting off. of the liabilities against the assets, different from Market value or realisable value. Kindly note that a good company will have lot of hidden assets as land, investments are all stated at cost and not at realisable value. So at times a shareholder may get more than the book value (in case of liquidation, a scenario highly unlikely in case of good companies, OR, might not even get the stated book value in case of corrupt or fraudulent companies like Satyam, etc)
Book Value – beautifully explained
Thanks
Souresh
Glad you liked it Souresh Sinharoy
Thanks for the post Shabbir! It was useful.
Regards,
Vaibhav K Sharma
The pleasure is all mine Vaibhav K Sharma
What Ramamurthy is trying to say is totaly diffrent from Shabbir. Actually Shabbir is providing the concepts in simple meaning. But Ramamurthy wants to make things more complicate and more deep.
For more dep concepts reader can read books.
“” .The main element” as on the date of liquidation” may be missed by an ordinary investor.So it could be misleading”” If the ordinary investor misses than forever he will remain ORDINARY.. Haa Haa
Agreed Romey and so added notes about liquidation and what it could actually happen just in case.
If book value is low then market price, like Tata steel, Hindalco and
cairn then can we buy these stock for 5 years horizon.. Thanks
No Sapan, you should never be buying a stock only based on book value because it is being offered at a discount to its asset because either the business is not doing things rightly or it may need lot more time to turn things around. 5Year or more is stock specific.
Buying shares is like buying a business and not buying the underlying asset. Book value can be used as an additional indicator of price of the stock and the premium you are paying for the business.
Definition of Book Value-Contradiction-You say it is Total Assets less patents,goodwill,less liabilities.You also say immediately later Book value means Total Assets.Pl clarify
Shareholders of a Company at the time of closure may not get the value stated in the Balance Sheet.The actual realised value may be more or less than the Balance sheet figure.You have omitted to say this. It is totally misleading.
Thanks for pointing that out Ramamurthy and it will not be total assets but net assets. Corrected in the article.
No actually they should be getting what is actually a book value but they may not get because book value when revealed may be of past times.
Like in this case we are talking about book value of stocks as of March 2015 but the book value as of March may be published in the month of April or May and if the book value is shrinking and company is about to liquidate, actual book value reported for a quarter will be different on the date it is being liquidated and so shareholder may get less.
It is not only that Book Value is history.Even assuming the book value is current it is wrong to say that the shareholders in the event of closure of the business will get the Book value.For example an item of plant and machinery has a balance sheet value of Rs 10 Lacs.When it has to be sold it may not be sold at Rs 10 lacs, The actual realisation could be Rs 9 Lacs or 11 Lacs.The realisable value plays a very important part.
Rs 10 Lacs value of machinery is depreciated value as well and so that becomes part of the accounting. The idea is not what will user get when it is being liquidated and it is better of selling the shares if you are minority share holder or buy if you can be part of the management of a company being liquidated but calculate share value of a stock based on what the net asset of the company is.
If you look at history of Indian stock market, there are very few companies who are actually liquidated. Even Satyam was not liquidated.
My comments were based on your main blog.Please visit your blog again.It was totally misleading.
Can you tell me exactly what is misleading like what is book value or why book value is important or book value example.
If the following statement is misleading let me know how because it says as on date which means the date it is being liquidated for its assets.
Will be more than happy to clear it out.
Shabbir
You say in your blog that in the event of closure of the company the shareholders will receive the book value as on date of liquidation. .The main element” as on the date of liquidation” may be missed by an ordinary investor.So it could be misleading.Perhaps you could have elaborated furthur.
Ramamurthy, I have added the note to make things more clear. Let me know your thoughts.
It is fine.Thanks a lot for the response to the thoughts of an ordinary investor like me.
No one is extra ordinary Ramamurthy and so don’t think it like that. The blog is for my readers to understand and if they have confusion, the whole point of my blog is invalidated.