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Welcome to professorsavings.com, we teach finance basics. Today we will teach you about understanding book value.
Hi I’m Rayfil Wong. We hope these investment concepts will help you be a better investor.
Book value tells an investor how much a company is worth if it ceased operating today.
DONE. Finito!
This includes selling all of its assets and paid off all its debts.
It is calculated by taking all tangible assets and then subtracting the liabilities.
Professor Savings is the CEO of Unicorn Computers Inc.
His company owns laptops, computers, and accessories plus everything a line of computer related product plus has $1,00,000 in cash and $500,000 in shares of other companies.
All together Unicorn Computer has tangible assets of $3,000,000.
These include not only the factory but the delivery trucks and anything that can be sold even Professor Savings’ desk.
Unicorn Computer Inc. has liabilities in the form of business loans worth $1,000,000.
If Professor Savings wants to know his company’s book value, he simply subtracts the liabilities from the tangible assets coming up with a book value of $2,000,000.
Book value is similar to the equity calculation on a balance sheet but it ignores anything that can’t be sold.
Book value is a component that investors use to evaluate stocks or companies.
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