Book Value Explanation
When deciding on the investment in a particular company through the purchase of stocks of the company, many investors refer to its book value as one of the components that guide their decision regarding the investment.
A company's value can be calculated in many ways. One of them is through market capitalization, which represents the amount of money you will need to buy all of the shares of stock at the prevailing market price.
Another method for determining the value of a company is through its Book Value. The latter can be found in the balance statement of the company. It is calculated in the following way:
Book Value = assets - liabilities
The Book Value of a company in its nature represents the money you will have after you have sold all of the assets of the company and have paid back all of the company's obligations.
A promising and growing business will have a value of greater than its book value. This will be caused by its ability to make earnings and growth on behalf of its owners.
In order to make realistic comparisons between different companies, you should convert to book value per share. It is calculated by dividing the book value by the number of outstanding shares.
The price to book ratio is often used by investors to look at the relationship between the book value and the price of the stock.
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