The Meaning of "Tangible" Book Value
When you want to know what a company's really worth, you need to find its liquidation value.
This means that a company’s real worth is what it would sell for in a complete liquidation. All liabilities would be paid off with assets, and the net difference -- liquidation value -- is the real value of the company.
Under the rules of fundamental analysis, comparisons of value between companies is based on calculating the tangible book value per share. This is the net of assets minus liabilities, further reduced by the book value of intangible assets (such as value assigned to goodwill, covenants, copyrights, trademarks, and patents, for example). These non-physical assets are assigned a value even though they are not tangible. Because their value is subjective, a true company-to-company comparison of value excludes them.
The true liquidation value of a company is somewhere in between the accounting value and tangible book value. It is negotiated. For example, a company with valuable patents or a recognizable brand name and trademark could get millions for selling, even though the value includes intangible assets.The complexities of accounting standards makes the valuation of companies even more difficult. There is no single method for assigning value to intangibles. This is why fundamental analysts simply remove them from the calculation and divide the net value by the number of shares of stock outstanding:
[ ( total assets - total liabilities ) - intangible assets ] ÷ common shares = Tangible Book Value
Tangible book value (per share) is the standard used to judge a stock’s current book value. By itself, it is not a comparative tool, because different companies have different numbers of shares outstanding. However, when you track the book value per share over many years, you can spot a trend. And in fundamental analysis, the trend reveals the direction of “value” -- positive or negative, over time.
Tangible book value, even when carefully calculated remains elusive and inaccurate. For example, real estate values are always listed at purchase value minus depreciation, even if its value is far greater today than when it was bought. Liabilities like long-term leases are excluded from the liability side. So the unfortunate truth is that even when you carefully adjust to remove the intangibles, the resulting “tangible” book value per share only tells you part of the story. A more detailed analysis of all assets and liabilities is needed to find out how much a company is really worth. But remember, the accounting rules leave out more than they include; so you cannot rely on what shows up on the balance sheet to decide what a company is worth. You get a more accurate picture when you compare the current stock price to book value per share. The P/E ratio (the multiple) tells you the market’s opinion of value, representing the number of years of earnings based on current price. That is the most important measurement of value investors and traders can use.
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