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.
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.
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.