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Gav - The definition you offer for "Book
Value", in your Basic Summary, is what is known as the "Net Realisable
Value".
"Book Value" is the figure that an asset is
recorded at in an entity's financial records.
In the case of a depreciable asset, e.g. a Motor
Car, it will be it's original cost less accumulated depreciation.
Original Cost will exclude GST if the entity is GST
Registered and it's Accounting Policy is to prepare Financial Statements on a
GST exclusive basis (which most do).
"Depreciation" is an amount claimed against revenue
so as to spread the cost of a depreciable asset over its useful
life.
The amount claimed for Depreciation may or may
not result in a "Book Value" that exactly reflects the 'Net
Market Value" of an Asset.
Financial Statements for "Normal" reporting
purposes are prepared on a going Concern Basis using the Book Value of
depreciated assets.
In the case of non-depreciable assets, e.g.
Debtors, Inventory, the valuation of those assets will be considered at balance
date and any write downs, but not write ups, deemed prudent will be made to
reduce their book values.
So - Book Value = What's in the Books, and not
necessarily Market Value
Market Value is another exercise and is what
those "Due Diligence" guys get up to.
JHTW
----- Original Message -----
Sent: Thursday, June 19, 2003 3:42
PM
Subject: RE: [sharechat] book value
Hi All.
> -----Original Message-----
>
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.
This is
true for the book value of an individual asset, but from an
investment
perspective I believe that to calculate the total book value of a
company
you must offset any liabilities against the assets to generate the
book
value. Perhaps a good indicator of the book value of a company is how
much
cash would be generated if the whole company was liquidated and
sold.
Before distributing the cash, all the debts must be paid off and then
the
remainder is paid out - this final amount for payment is what I would
call
the book value.
Book value is pretty much a snapshot of the
current point in time, it does
not take into account future
earnings.
Market capitalisation, the markets value of the company, on
the other hand
is a speculative value of the current book value _plus_
future earning
potential. If a company is expected to generate good growth
(and hence
earnings) in the future, then investors are prepared to pay a
premium for
the future earnings and the market cap will be greater than the
book value
of the company. As market cap is number of shares * share price,
the Price
to Earnings ratio (P/E) is one indicator of the current premium
that the
market has on future earnings for the company. The higher the P/E,
the more
growth in earnings is expected by the market and the higher
premium an
investor will pay for partial ownership of the company.
I
guess a basic summary is: -
* book value is how much cash would be
generated if all the assets were
sold for a fair price and outstanding
debts being paid off
* market value is the markets current valuation
of the business, which
incorporates both book value, and speculation on
future earning potential.
Hope this helps!
Cheers
Gav
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