Definition:

The book value method is a method of valuing a company’s stock based on its book value per share. Book value per share is calculated by dividing the company’s total equity by the number of outstanding common shares.

Formula:

Book Value per Share = (Total Equity) / (Number of Outstanding Common Shares)

Key points about the book value method:

  • Valuation method: The book value method is a simple method for valuing a company’s stock.
  • Historical cost: Book value is based on the historical cost of the company’s assets and liabilities.
  • Market value: Book value may not always reflect the market value of a company’s stock.
  • Limitations: The book value method has limitations, as it does not consider factors such as future earnings potential, intangible assets, and market conditions.

Why is the book value method used?

  • Simplicity: The book value method is a simple and easy-to-understand method for valuing a company’s stock.
  • Benchmark: It can be used as a benchmark for comparing the value of different companies.
  • Financial analysis: Book value is used in various financial ratios, such as price-to-book ratio and return on equity.

However, it’s important to note that the book value method has limitations and may not provide an accurate valuation of a company’s stock in all cases.

In essence, the book value method is a method of valuing a company’s stock based on its book value per share, and it’s a simple and easy-to-understand method.