The term book value refers to the actual value of a business after subtracting preferred stock, liabilities and intangible assets from total assets. Book value provides a more accurate representation of the value of a stock than the stock’s market capitalization because it does not reflect supply and demand for the stock.
However, book value is not a completely accurate measure of a company’s value because the recorded book value of assets may be higher than their actual cash value.
Example: A company may own thousands of computers and have those computers accounted for under their original, high purchase price even though technological advancements have made those computers completely worthless.
For this reason, when looking to invest in a company, it is always better to assume that its book value is somewhat higher than the actual value of its assets.
See also: Fundamental analysis.
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