What is Book Value of a Company

Book value of a company is one of the most important factors while investing in a company.  In layman’s terms the significance of book value per share is the amount that can be paid on a single share in case of bankruptcy or liquidation.

It is defined as the ratio of Share holders Fund and Number of Outstanding Shares. 

Share holders fund is the product of face value and number of shares plus reserves and surplus (undistributed Profit).

Book Value =  ((Face Value of a share *  Number of Shares) + Undistributed Profit )/ Number of Shares

In some cases investment decision can’t be taken by merely looking at the book value. For example in case if a company’s intangible assets (like brand value) are very high, the above calculation which includes only tangible assets doesn’t hold good.  This is because the company can earn more money just using its brand name (for eg: income through franchisees).

 

 

 

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May 14, 2009 | Filed Under Fundamental Analysis 

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