net book value

Net Book Value — Overview, Formula, and Importance

net book value

Net book value (NBV) refers to a company’s assets or how the assets are recorded by the accountant.

NBV is calculated using the asset’s original cost – how much it cost to acquire the asset – with the depreciation, depletion, or amortizationAmortizationAmortization refers to the process of paying off a debt through scheduled, pre-determined installments that include principal and interest of the asset being subtracted from the asset’s original cost.

Subtracting Depreciation/Depletion/Amortization

Over time, assets lose some of their value. When calculating NBV, the depletion or depreciation and any amortization of the asset’s value must be subtracted from the original cost over the course of the asset’s useful life. (Every asset has a reasonable period of time over which it can be used or useful.)

Salvage valueSalvage ValueSalvage value is the estimated amount that an asset is worth at the end of its useful life. Salvage value is also known as scrap value or residual value, and is used in calculating depreciation expense. The value depends on how long the company expects to use the asset and how hard the asset is used.

For example, if a is another factor to be considered. Some assets may have more value that can be derived from them after the end of their useful life. For example, consider a logging company that purchases a hauling truck.

It may have a salvage value that will make it useful in another way instead of simply scrapping the truck once it no longer functions in its hauling capacity.

What all of the above means is that the NBV of an asset should decrease fairly steadily and predictably over the useful life of the asset. When it reaches the end of its useful life, the NBV should be equal to its salvage value.

Calculating Net Book Value

The formula for calculating NBV is as follows:

Net Book Value = Original Asset Cost – Accumulated Depreciation

Where:

  • Accumulated Depreciation = Per Year Depreciation x Total Number of Years

Sample Calculation of Net Book Value

Let’s put in the example of the logging truck mentioned above. If the logging company purchased the truck for $200,000 and the truck depreciated $15,000 per year for 4 years, the calculation of NBV would look below:

Accumulated Depreciation = $15,000 x 4 years = $60,000

Net Book Value = $200,000 – $60,000 = $140,000

In our example, the NBV of the logging company’s truck after four years would be $140,000.

Importance of Net Book Value

Net book value is among the most popular financial metrics around. It is especially true when used to help give value to a company – either for the company’s own accounting records, if the company is considering liquidation, or if another company is considering taking over the business.

Market value is another important metric; however, NBV and market value typically aren’t equal. Market value changes every time prices change.

It’s also important to understand that NBV is affected by how rapidly depreciation is reported and calculated by a company. Depreciation is always accumulated, however, some companies choose to accelerate depreciation.

In such a case, the NBV will be significantly lower than the market value for the first few years of the asset’s useful life. NBV is incredibly important for a company to know. It makes for fairer and more accurate accounting records and helps to express a true approximation of the company’s total value.

Additional Resources

We hope you’ve enjoyed reading CFI’s explanation of Net Book Value. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™FMVA® CertificationJoin 350,600+ students who work for companies Amazon, J.P. Morgan, and Ferrari certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources listed below:

  • Depreciation MethodsDepreciation MethodsThe most common types of depreciation methods include straight-line, double declining balance, units of production, and sum of years digits. There are various formulas for calculating depreciation of an asset. Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life.
  • Market Value Added (MVA)Market Value Added (MVA)Market value added (MVA) is the amount of wealth that a company is able to create for its stakeholders since its foundation. In simple terms, it’s the
  • Net Asset ValueNet Asset ValueNet asset value (NAV) is defined as the value of a fund’s assets minus the value of its liabilities. The term «net asset value» is commonly used in relation to mutual funds and is used to determine the value of the assets held. According to the SEC, mutual funds and Unit Investment Trusts (UITs) are required to calculate their NAV
  • Projecting Balance Sheet ItemsProjecting Balance Sheet Line ItemsProjecting balance sheet line items involves analyzing working capital, PP&E, debt share capital and net income. This guide breaks down how to calculate

Источник: https://corporatefinanceinstitute.com/resources/knowledge/accounting/net-book-value/

Net Book Value (Meaning, Formula) | Calculate Net Book Value

net book value

Net book value refers to the net value or the carrying value of the assets of the company as per its books of account, which is reported on the company’s balance sheet, and it is calculated by subtracting the accumulated depreciation from the original purchase price of the asset of the company.

Net Book Value Formula

The formula used to calculate the net book value of the assets is as below:

Net Book Value formula = Original Purchase Cost – Accumulated Depreciation

  1. Original Purchase cost here means the purchase price of the asset paid at the time when the company purchased the assets.
  2. Accumulated depreciation here means total depreciation charged or accumulated by the company on its assets till the date of the calculation of the net book value of the asset.

Net Book Value Calculation Example

Let’s assume that the company Jack ltd purchased plant and machinery on January 1, 2011, worth $800,000 having a useful life of 10 years. The company has the policy to depreciate all assets annually using the straight-line method of depreciation. Calculate the net book value of the asset for the financial year ending on December 1, 2018.

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Answer

For the case of the company as given above, the purchase price of the asset is $800,000 on January 1, 2011.

The useful life of the asset is 10 years, and the company has the policy to depreciate all assets annually using the straight-line method of depreciation.

So, we calculate the depreciation, which will be charged every year, by dividing the purchase price of the asset with the useful life of the asset.

In order to calculate the net book value, accumulated depreciation charged till the financial year ending on December 1, 2018, will be calculated for the 8 years.

So, the NBV of the asset at the end of the financial year 2018 that will be reported on the balance sheet of the company comes to $16,000.

Advantages

  1. The NBV of the company is the most used financial measure while valuing the companies and is measured for all the assets, whether they are tangible assets building, plant & machinery, or intangible assets a trademark, copyright, etc.
  2. At the time of liquidation of the company, the valuation of the company is its NBV of the assets, and it is the main base for measuring assets value.
  3. The net book value is used for calculating various financial ratios.

    These ratios, calculated using net book value of an asset, helps in knowing the company’s market returns and stock market price.

Disadvantages

  1. The main disadvantage of the company’s net book value is that it is not same as the market value of the company as it is the cost of an asset less accumulated depreciation and is generally far away from the market value or maybe it can be close to the asset’s market value but generally never equals to the market value.

  2. It is considered while evaluating the growth of the company. Still, it is not a correct indicator measuring the growth prospects of the company as the book value can be lower than the earning potentials of the company.
  3. There is a possibility that the NBV of the asset is not calculated correctly as calculation of book value is very critical as it requires various compliances with applicable laws and standards. So deriving actual book values is sometimes difficult, and using it as a base for evaluation may lead to wrong decisions.
  4. This changes over a period of time. Therefore relying completely on the NBV can make the asset valuation inappropriate.

Important Points

  1. The NBV of the asset keeps on changing and generally, in case of the fixed asset it keeps on declining due to the effects of depreciation or depletion and at the end of the useful life of the fixed asset, the NBV of the fixed asset is equal to its salvage value approximately.
  2. Generally, the companies value their assets at cost or market price, whichever is lower. In case the market price of the asset is less than its cost, then the NBV of the asset has to be its market price. In such a case, the impairment of the asset is done, i.e.

    , lowering the asset net book value to its market price, which leads to sudden downfall in the value of the asset.

  3. The market price of the asset is different from its NBV at any point in time. It is as per the company’s policy that how quickly or slowly the asset is depreciated. If the company depreciates its asset using accelerated depreciation, i.e.

    , allowing a higher deduction in the beginning years of the asset, then in the initial years, the net book value of the asset will be less than its market value.

Conclusion

Net book value is the cost of the asset at which the asset is purchased, which includes the purchase price of the asset plus all expenses that are incurred in making the asset ready to use less the accumulated depreciation or any impairment losses. It is considered to be the most used financial measure for the valuation of the company, and the net book value is most cases is different from the market value of the asset.

It is the base of reporting of the figures in the balance sheet of the company. Primarily for the analysis of the growth potentials, the investor refers to these net book value figures only. Hence, the companies should focus on the correct calculation of such figures before reporting them in the financial statements.

This article has been a guide to What is a Net Book Value & its Meaning. Here we discuss formula to calculate the net book value example along with advantages and disadvantages. You can learn more about from the following articles –

Источник: https://www.wallstreetmojo.com/net-book-value/

Difference Between Face Value, Book Value, Market Value and Intrinsic Value of Stocks

net book value

We often come across stock metrics Face Value, Book Value, Intrinsic Value and Market Value. What does these terms mean?

How important it is for us to know the difference between them?

A basic question that arise here is, does these definitions help us to pick better stocks?

So you can see, these terms alone trigger few basic but intriguing questions in our mind. 

all the terms mentioned here, my favourite ones are intrinsic value and market value. Why?

Because it is these two terms that basically defines how overvalued or undervalued is a stock. 

A stock which is undervalued is certainly a better stock to buy. 

Read more about best stocks here…

For the moment lets focus more on establishing the difference (relationship) between face value, book value, intrinsic value and market value.

Key Difference…

Face value and book values are more of a static theoretical numbers

Whereas intrinsic value and market value are more liquid and real numbers.  

Face value and book value are entries made in companies balance sheet for the sake of bookkeeping only. 

There are rules, which these value shall be recorded in the companies book of accounts.

Hence I called it “theoretical numbers”. 

These values may or may-not resemble the “true value”. 

This is where it gets confusing, right? So let me bring in examples to make things more clear.

Lets start with the face value first…

#1. Face Value…

To get more clarity about face value, lets see how to calculate face value of stock…

To do this we will need two numbers:

  • Equity share capital.
  • Number of shares outstanding. 

Face Value = Equity Share Capital / Nos. of Shares

In other words, face value is nothing but equity share capital per share. 

From where to get these numbers? 

Though these numbers are all available in annual report of companies, but I will try to use a more accessible source. Moneycontrol.

In moneycontrol, equity share capital can be obtained directly from companies balance sheet.

Number of shares outstanding can also be obtained in moneycontrol. 

Open the stock page in moneycontrol. Go to Shareholding > Shareholding Pattern.

The required data related to “nos. of shares” will look this:

So from these reports we have to pick two important numbers:

  • Equity Share Capital = Rs.513.31 Crores.
  • No of Shares = 256,72,62,063 nos (256.726 Crore nos). 

Once we have these two values, its easy to calculate the face value.

Face Value = Equity Share Capital / Nos. of Shares

Face Value = 513.31 / 256.726 = Rs.2 per share.

Now that we know how face value is calculated, it will be easier to establish a difference (or relationship) between face value, book value etc. 

So lets proceed with book value calculation. This will establish a clear relationship (also difference) between them.

#2. How to calculate book value stock?

There are two ways to do it. Lets make it easy by remembering two formulas:

(Book Value) per share = Face Value + Reserves Per Share.

Formula_2.1

I generally calculate book value by the above formula. 

But by definition of book value, its formula should be as below:

(Book Value) per share = (Total Assets  – Total Liability) per share.

Formula_2.2

Lets try to calculate book value using both the above formulas.

Formula_2.1

(Book Value) per share = Face Value + Reserves Per Share.

For this, now we need to calculate “Reserves per share”.

In moneycontrol, Reserves can be obtained directly from companies balance sheet.

So from these reports we have to again pick two important numbers:

  • Reserves = Rs.62,931.95 Crores.
  • No of Shares = 256,72,62,063 nos (256.726 Crore nos). 

Reserves Per Share = Rs.245.13 (62931.95/256.726)

(Book Value) per share = Face Value + Reserves Per Share.

(Book Value) per share = Rs.2 + Rs.245.13 = Rs.247.13

Formula_2.2

(Book Value) per share = (Total Assets  – Total Debt) per share.

For this we need to calculate Total Assets minus Total Debt.

In moneycontrol, “total debt & total asset” can be obtained directly from companies balance sheet.

So from these reports we have to again pick three important numbers:

  • Total Debt = Rs.6,27,884.42 Crores (601638.85 + 26245.57)
  • Total Assets = Rs.691,329.57 Crore.
  • No of Shares = 256,72,62,063 nos (256.726 Crore nos). 

Total Asset – Total Debt = 63445.15 (691329.57 – 627884.42).

(Total Asset – Total Debt) per share = Rs.247.13 (63445.15 / 256.726).

Using this formula, (Book Value) per share = (Total Assets  – Total Debt) per share.

(Book Value) per share = Rs.247.13

Relationship Between Face Value and Book Value…

(Book Value) per share = Face Value + Reserves per share.

#3. Relationship Between Market Value, Face Value and Book Value…

The above picture is a very crude representation of market value of a stock.

Market Value = Book Value + Built-up Value.

A simpler formula of market value of stocks will be this:

Market Value = Market Price X Nos. of share outstanding. 

In websites moneycontrol, market value of share is the most dominantly displayed data.

It is the market price of stocks at which we buy and sell our stocks. 

Hence, this is the most important stock metric when it comes to stock trading. 

It is this value which actually decides if the investor will make a profit or loss. How?

To understand this, we must understand another important relationship. 

#4. Relationship between intrinsic value and market value…

What we have seen till now:

  • Face Value can be calculated from data in balance sheet. 
  • Book Value can be easily calculated from data in balance sheet. 
  • Market Value is visible everywhere (no need to calculate).

The main difficulty in stock investing arise in estimating intrinsic value of stocks.

What is utility of intrinsic value?

Comparison between intrinsic value and market value decides if the stock is overvalued or undervalued. 

Overvalued : Market Price > Intrinsic Value. 

Undervalued: Market Price < Intrinsic Value.

What is the difference between intrinsic value and market value?

Ideally speaking, market price of stock should be equal to its intrinsic value.

But in real world stocks do not always trade at its intrinsic value. 

In fact in most of the time, good stocks trade at overvalued price levels. Means, they trade at price above its true value

Intrinsic value is the estimated true value of stocks. 

Market value is the value of the stocks at which stocks are currently trading. This may be above or below its intrinsic value (true value). 

So you may ask, if a stock is trading above its true value, why people buy them at all?

Because most of the people who trade stocks does so without knowing its true value. Why?

Because estimating intrinsic value of stocks is a special skill and it must be learnt. 

I use my stock analysis worksheet to estimate intrinsic value of stocks. 

Final words…

Face value of stocks is a value which is used just for bookkeeping purpose.

We can also remember face value as the “original cost” of the stock as issued by the company. 

Frankly speaking, remembering face value is of basically no utility for the investors. 

People may recall it only for academic reasons. 

Book Value of stock is more useful than face value. 

Investors can compare market value with book value (P/B ratio), to get a hint about stocks price valuation. 

Read more about book value of stock here…

It is the comparison between Intrinsic value and market value of stocks which is most important for investors. 

Источник: https://getmoneyrich.com/difference-between-face-value-book-value-market-value-and-intrinsic-value-of-stocks/

Book Value: What is Book Value of a Company? How to Calculate?

net book value

Occasionally I will write about some basics of value investing, starting with book value, and in the process highlight and illuminate some of the basic stock market terms, key principles as well as give an idea of how I use these indicators or ideas in my own stock selection. Book Value is one of the key concepts in investing

What is Book Value? How to Find or Calculate Book Value?

The way to identify an undervalued stock is to empirically determine an intrinsic value of the stock that serves as a benchmark against which the stock price can be compared.

If this intrinsic value is higher than the stock price in the market today, than the stock can be considered undervalued and vice versa.

Over the years, many methods of establishing this valuation benchmarks have been devised and are in use today. Book Value of a stock is one such method.

Definition of Book Value

The book value of a company is calculated by estimating the total amount a company is worth if all the assets are sold and the liabilities are paid back.

Check out this key financial ratios list

Book Value Formula

The book value of a stock = book value of total assets – total liabilities.

The book value calculation in practice is even simpler. If you look up any balance sheet you will find that it is divided in 3 sections: Assets, Liabilities and Shareholders Equity. Since Asset minus Liability always equals Equity, getting the book value of the stock is as simple as reading off the value on the Total Equity line.

(The above discussion is at the company level. You will also come across book values for individual assets. These are simply the value at which these assets are carried on the company’s books.

Book value of an asset equals the cost of the asset minus the accumulated depreciation.

To go from the book value of total assets to book value of the company, you also need to subtract the liabilities)

How to Calculate Book Value per Share

Calculating book value per share requires that we take the book value of the company and divide that into the total number of shares outstanding.

Therefore, Book Value per Share = Book Value / Shares Outstanding

Book value per share formula above assumes common stock only. If there is preferred stock outstanding, in the book value per share calculation above,the numerator will need to be adjusted by  the value of the preferred stock outstanding to get the stock holder’s equity attributable to the common stock holder.

There are book value per share calculator available on the internet if you wish too consult one. However, the math is quite simple and there should be no need to do so.

Discover our recommended stock market websites

Why Use Book Value as a Valuation Method?

Book Value of a firm, in an ideal world, represents the value of the business the shareholders will be left with if all the assets are sold for cash and all debt is paid off today. It is therefore a much more conservative way of valuing a company than using earnings based model where one needs to estimate future earnings and growth.

Earnings estimations are always wrong as they are essentially guess work (there may be exceptions in well regulated utilities markets where prices are regulated and earnings growth is highly correlated to population growth which can be modeled with a high degree of confidence).

There are too many variables that influence earnings, and one has no way of accounting for these variables in the future when making these projections.

Working with Book Value is more firmly grounded in today’s reality. In this case, we are not at all concerned about earnings growth and profitability of the company.

All we care about is whether we are able to buy the business for less than what its assets are worth (after accounting for liabilities). This is commonly expressed as the ratio of Price to Book. In this case, we are looking for a P/B ratio of less than 1.

After all, if we are able to do this, we can quickly turn around and sell these assets in the market one by one and realize a quick profit.

However, in reality, one needs to exercise caution when using a simple Book Value to evaluate a stock.

Read: counting money games

Book Value of Stock is Not Always What it Seems

It is important to realize that the book value that is reported on the balance sheet is an accounting number and as such it may or may not be the same as the true market value of equity sitting on the company’s books.

For example, care must be taken when ascribing value to the long lived assets such as plant, property including real estate and equipment. Accounting requirements do require that most of these assets (except real estate) be depreciated at a pre-determined rate.

The expectation is that depreciating assets at their specific schedules makes the book value of an asset close to the market value as it is the historical wear and tear of the asset in question. But this is not always true. For example, a plant may still be using equipment that is decades old and has been fully depreciated but clearly has some economic value.

In this case, the book value of old equipment is considered to be a big zero on the accounts, but the utility is clearly there. I have personally seen examples of this in some old line manufacturing industries. Granted that this equipment may not be worth much more than scrap value in the market place but that is also not always true.

Book value of assets are always at variance to their true market values, and an intrepid investor will correct for this when estimating the true book value of equity.

Real estate presents another challenge. They are typically not marked to the market and are carried at their historical valuations on the balance sheet.

Consider a company that owns 100s of thousands of acres of real estate in Florida, at an average booked cost of $2000/acre. This company is now developing retirement resorts and communities on this real estate.

Clearly the value of the real estate is enhanced by the use that it is being put to but if you just go by the book value on the balance sheet, you will miss this important point.

(Yes, there is a company this doing just that)

Inventory Can be Simple or Complicated

Inventory, if it turns fast enough, is typically not a problem. However, depending on the accounting method the company uses to value inventory, its value may be off quite a bit from its true market value.

If the company uses a LIFO method (Last in First out) of inventory valuation, in a rising price environment the company will be expensing more than it is truly using and hence the inventory on the books may be under reported.

Reverse is true for falling price environment (for example in semi-conductors and other high tech industries). One can construct similar arguments for the FIFO method of valuing inventory.

When I was running my own manufacturing company, this mismatch became quiet clear to me as even though our inventory overall turned pretty well, not all segments of the inventory did.

There were quite a few types of inventory that moved really slow and they always tripped us up when we sat down for product planning or strategy sessions.

It always pays to look deeper in the inventory line item, just to make sure that you are not surprised later.

Intangibles

A company, if it has been operating for a while, has other assets that are intangible. Some of these intangibles are reported on the balance sheet. For example, Goodwill, or as it is sometimes called, Cost in Excess, is the amount this company has overpaid in the past for acquisitions.

This value is amortized, but as a potential investor looking to buy stocks, you need to ask if the Goodwill that remains on the balance sheet is really worth what is says it is.

Did the company actually receive additional value from these acquisitions that is really worth this amount? Some such sources of value could be a Patent portfolio, customer lists, brand value, etc.

Typically, a major part of goodwill is just fluff as companies end up over paying for acquisitions as they are not objective judges of value :-). If there is really some value in the goodwill, than that needs to be reflected in a better profit margins for the company (see: how can I calculate profit margin?).

The company itself may own sources of value that are intangible and are not represented on the balance sheet. It is not on the balance sheet as the market has not yet ascribed value to these assets, such as through acquisitions or other similar transactions.

For example, a company Google or Microsoft have great intangible value in the quality of their employees as well as their dominant positions in their markets.

A good value investor will not skim over these sources of value and will try to ascribe reasonable valuations to them.

How to Determine if a Stock is Undervalued Using Book Value

A very simplistic way of using book value to determine if the stock is undervalued is to look at the market to book value ratio. This is also called the price to book ratio (p/b ratio).

This is similar to price to earnings ratio but uses an asset based denominator instead of an earnings based denominator.

A p/b ratio of less than 1 implies that the market is undervaluing the stock to some extent.

A good value investor will look a little deeper. Since we now know that the values of assets on the books can differ significantly from the true value of these assets in the market, we should try to recast the entire balance sheet to  be closer to the market values and then recaculate the book value of the equity.

During this process, a good value investor will also be quite conservative in his estimation. Entire categories of assets (intangibles and goodwill) could be simply discarded if the value investor feels that these assets may be worth very little. Pretty much, only thing that retains its value 1:1 in this recalculation of book value is short term cash.

But what if we do  not have a good way of estimating the proper market values of assets? What is certain long lived assets have no market at all? Perhaps it is time to be more strict and narrow in our appreciation of value.

How to Find Book Value Per Share that is Usable if Market Values are Uncertain

As you can imagine, proper analysis of the balance sheet requires quite a bit of work. One way to avoid this is to find stocks where this level of detailed work is unnecessary to establish its value. Net Tangible Book Value and Net Current Asset Value are two such measures that to one degree or other simplify the balance sheet valuation process.

Net Tangible Book Value: Here, we take the book value of a company and subtract the intangible asset value, counting them for nothing. If a company is still undervalued, than it is most ly a great buy.

Net Current Asset Value (NCAV): This goes one step further and removes the Long Term Assets from the Net Tangible Book Value.

What you have left over now is just the Current Assets (assets that are either cash or can be quickly converted to cash) less Total Liability.

If the resulting value is higher than the market value of the company, this stock is a definite buy. These cases are rare but do exist.

I lean towards balance sheet valuation and most stock picks in premium section are this. However there are situations where this may not reveal enough good stock candidates and one needs to look to the earnings for finding more undervalued stocks. In one of the future articles I will write about how to use earnings to estimate intrinsic value of a stock.

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Источник: https://valuestockguide.com/all/what-is-book-value-of-stock/

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