Forum Archive Index - June 2003

["Martin Ryan" <mryan@cortell.co.nz>]

Anyone feel free to correct me if they think I'm wrong.

Book value is the the accounting value of assets.  For example you buy a
nice Mercedes, you have an asset.  But the book value of the asset decreases
over time as deprecation sets in.

E.g. Historical cost (what you bought it for) $120,000
Depreciation to date (using whatever method)  $ 40,000
Leaves a book value of $80,000 - this is what an accountant would say the
car is worth.

It has a lot of competition as a valuation method though.  What it is trying
to achieve is work out the value of an asset at this point in time.  In this
case the book value of the Mercedes right now is $80,000, but you might know
someone who thinks it's a gem of a car, and wants to pay $100,000.  That is
the market value of the car.  On the other hand you may not have treated it
well, and people might only be interested in paying $50,000 for it.  So the
market value is actually $50,000.  No where near the book value.

Share price is a closer reflection of the market value of a company.  It may
have assets, at book value, of $1,000,000 but everyone knows the market it
is involved in is slipping, and its assets will not be much good if they
were separated from the company.  So maybe investors collectively think the
market value of the company is $800,000.  If there are a million shares,
each one will therefore be worth $80c each, not the $1 each that the book
value thinks they should be worth.

If you see a share price outdoing the book value, then people see synergy:
they think the company is worth more than its assets, i.e. it is leveraging
those assets well.  When it's lower, the company is not doing its assets
justice.

I'm just an accountant posing as an investor though.  Real investors, please
tell me if my take on the share price part of it is incorrect.

Marty

-----Original Message-----
From: sharechat-owner@sharechat.co.nz
[mailto:sharechat-owner@sharechat.co.nz]On Behalf Of cab105
Sent: Thursday, 19 June 2003 1:28 p.m.
To: sharechat@sharechat.co.nz
Subject: [sharechat] book value


Hello,

could somebody please explain the meaning of 'book value' to me, and in
particular why it differs so markedly from shareprice? In most cases I've
seen
it is lower than the share price, occassionally equal to, and rarely greater
than.

thanks

Carl



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