Adjusted Book Value: What it is, How it Works

For example, the value of land recorded on the balance sheet is the historical cost, and it needs to be adjusted to reflect the current fair market value of the asset. Ideally, the fair market value of the land will be higher than the historical cost, since land appreciates in value over a period of time. The book value or asset-based valuation method determines the net asset value (NAV) of a business by analyzing the company’s balance sheet. In this example, we have considered two main sections of the balance sheet – Assets and Liabilities. The total assets for ABC Ltd amount to Rs. 77,50,000, while the total liabilities amount to Rs. 32,00,000.

Whereas, a face value is the nominal value of a security, such as a share of stock. The book value of a share, also known as the “book price,” is the value of a company’s equity divided by the number of outstanding shares. By representing the net asset value per share, it allows investors to assess the portion of assets allocated to each outstanding share.

1. The guideline transaction business valuation method (GTM) calculates a company’s current value by estimating comparable companies during the transaction.
2. Deriving the book value of a company is straightforward since companies report total assets and total liabilities on their balance sheet on a quarterly and annual basis.
3. The method adjusts the value of tangible assets line by line to arrive at a bottom-line price.

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Intangibles and the Asset-Based Valuations

So if a company has $100 million dollars in net assets and 10 million shares outstanding, then the book value for that company is $10 a shares ($100 million in assets / 10 million shares). If the price of the stock stands at $20 a share then the price to book value ratio is 2.0 ($20 price divided by $10 book value). This method looks at the value of a company in terms of the current market values of its assets and liabilities.

The second way, using per-share values, is to divide the company’s current share price by the book value per share. In general, a low price to book value indicates that a stock is undervalued and thus more desirable. That is, it is a statement of the value of the company’s assets minus the value of its liabilities. Adjusted book value is the measure of a company’s valuation after liabilities—including off-balance sheet liabilities—and assets adjusted to reflect true fair market value. However, it’s not often accepted as an accurate picture of a profitable company’s operating value; however, it can be a way of capturing potential equity available in a firm. Sometimes these people estimate the value of a business based on what is reported on its balance sheet – reported shareholders’ equity, also commonly known as the book value of equity (“BVE”).

The book value per share is the measure of the recorded value of the company’s assets less its liabilities — the net assets backing up the business’s stock shares. The book value of a company is the total value of the company’s assets, minus the company’s outstanding liabilities. The company’s balance sheet is where you’ll find total asset value, and for accounting purposes, the cost of acquiring the asset is the starting point for what you’ll find listed in the company’s financials. The balance sheet also takes into account accumulated depreciation of those assets, and that helps bring the true value of the assets closer to the number used for book value purposes.

The market capitalization of earnings method

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This method reviews the business based on the price-to-sales ratio (P/S) of similar companies before acquisition. The adjusted book value method of valuation is most often used to assign value to distressed companies facing potential liquidation or companies that hold tangible assets, such as property or securities. Analysts may use adjusted book value to determine a bottom line price for a company’s value when anticipating bankruptcy or sale due to financial distress. This can be thought of as the amount that shareholders would theoretically receive per share of stock held if the company went out of business and all the assets were liquidated. As an asset, goodwill is created when a company buys a functioning business and integrates the new business into existing operations.

Why would you need a business valuation?

All identifiable assets of the new acquisition are recorded by the acquiring company at their individual acquisition-time fair market values. The income approach or discounted cash flow analysis (DCF) calculates the expected future cash flows of a business in a given time frame. Discounted book value method of valuation cash flow determines the current market value of an investment by projecting the company’s expected value. The adjustment process becomes more complicated with things like intangible assets, contingent liabilities, deferred tax assets, or liabilities, and off-balance sheet (OBS) items.

Both of these methods are deficient in that they poorly demonstrate the value of intellectual property, human capital, and company goodwill. The times-revenue valuation method determines how many years of earnings will be necessary to recoup the purchase price of a business, which can be useful when comparing it to similar businesses. The profit-to-earnings valuation method (a.k.a. P/E ratio) evaluates the price of a company’s shares relative to its earnings per share (EPS). This means that the market price of the company’s shares is 1.5 times higher than its book value per share. Investors can use this ratio to assess whether the stock is trading at a premium (P/B ratio above 1) or a discount (P/B ratio below 1) relative to its BVPS.