Book value is the value of the asset or security that is entered in the company’s book. It is important for an investor to know the book value of assets and securities while making investment strategies and decisions. Further, it assists to calculate the book value per share of the company.
What is the book value and, what does it tell you?
The book value can be calculated by reducing the total liabilities from the company's total assets.
The book value indicates the total value of assets of a company according to its accounts(books/ financial statements). That means it says the real worth of the company according to the financial statements.
If the company is going to liquidate, shareholders can expect to receive this much money will distribute among them.
Risk of using book value and when not to use book value
Book value cannot be used for comparing companies. Investors can use the price to book value ratio for comparisons.
The real value may be different from the calculated value, since its an accounted value and it depends on the time that the account happened.
So never take decisions by only looking at book value. Always analyze as possible by considering different factors like other ratios and business news. Always try to use multiple ratios combinedly to get a more clear picture of a company.