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Question:


What is “book value”?
-NoniGinger


Answer:


The short answer is that it’s a company’s net worth. Subtract the value of liabilities from assets and there you have it. Except that it’s not quite so simple. When the United States was more of a manufacturing economy, calculating book value was substantially a matter of figuring the worth of concrete things like steel mills or bolts of fabric in inventory. That’s no small feat in itself, as there are several ways to measure the value of such tangible assets – the cost to replace them, for instance, or the amount the company that possesses them could receive on the open market. There can be yet another value calculated according to the quirky rules of accounting, factoring in depreciation, amortization and whatnot.
 
It gets trickier. Some calculations of book value include intangibles. If you think it’s a chore figuring out what physical assets are worth, how about the value of intellectual property or a corporate brand? Such ephemera have become even more important in our increasingly high-technology, service-oriented economy. If you’re not sure what a steel mill is worth, then try putting a price on the expertise locked up in the brain of a drug designer employed by Pfizer or on Microsoft’s patents for Windows. On Wall Street a stock with a low ratio of price to book value is generally considered more of a bargain and therefore more desirable to own. But while a stock’s price is there for all to see, book value is somewhat less transparent and easier to fudge. It’s hard to know what an asset is really worth until someone offers to buy it or until it has a sufficiently long, consistent history of producing cash with it.
-Conrad de Aenlle



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