Investing your hard-earned money requires research and planning. Factors such as safety, return, risk and more play a crucial role in this process. One such factor is measuring the book value of a stock or a company. Watch our engaging and easy-to-understand video from the ‘Learn With Upstox’ series to understand the term book value, know its importance, and learn how to calculate it.
Just for a minute, assume that I’m holding a stock worth Rs. 100 in one hand and I owe my friend Rs. 20 because I borrowed this amount from him. What do you think is my net worth?
Simple, we subtract the Rs. 20 I owe to my friend from the Rs. 100 I own in stock. Basically, subtract what you owe from what you own. That’s how you get your net worth.
We’re going to use this concept of net worth to understand ‘book value’.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
Let’s discuss the book value and net worth of a company and how this is calculated.
What is the book value of a company?
Let’s elaborate a little on net worth, before we understand book value. You might have heard that the net worth of a company is equal to its total assets minus its total liabilities. But how do you calculate this from a balance sheet?
How is book value calculated?
It's simple. The book value is normally the sum of a company’s retained earnings and shareholder equity. These are 2 big concepts – shareholders’ equity and retained earnings.
Shareholder’s equity is simply how the company was financed, via common shares and preferred shares. Retained earnings are everything that the company has saved from its previous years of profit. When we add these two, the reserves and the shareholder equity, we end up getting the net worth of the company, which is also called as the book value of the firm.
What does book value indicate?
Now, when we divide this book value by the total shares, we get the book value per share. That is, the money that you would get for every share you own today, if the company decides to sell off all their assets and has repaid all their liabilities.
Let’s take a small example here - Infosys had the most recent reserves of Rs. 69,492 crores and shareholder equity of Rs. 2,123 crores. That means, their total book value was Rs. 71,615 crores. Infosys also has total shares outstanding are 426 crores.
If we divide the book value by the total number of shares, we get the book value per share of Rs. 168. You can simply Google the book value of any company as well, but this is the concept behind it.
So today we saw how to calculate the book value of a company and what that indicates.
That’s it for now. Thank you so much for watching our video on book value, in our series, Learn with Upstox. I hope you learned something today.
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