A:

Book value and intrinsic value are two ways to measure the value of a company.

In simple terms, book value is based on the value of total assets less the value of total liabilities - it attempts to measure the net assets a company has built up until the present time. In theory, this is the amount that the shareholders would receive if the company were to be completely liquidated. For example, if a company has \$23.2 billion in assets and \$19.3 billion in liabilities, the book value of the company would be the difference of \$3.9 billion (book value). To express this number in terms of book value per share, simply take the book value and divide it by the number of outstanding shares. If a given company is currently trading below its book value, it is often considered to be undervalued.

There are, however, several problems that arise with the use of book value as a measure of value. For example, it would be unlikely that the value the company would receive in liquidation would be equal to the book value per share. Nevertheless, it can still be used as a useful benchmark to estimate how much a profitable company's stock might drop if the market turns sour on it.

Intrinsic value is a measure of value based on the future earnings a company is expected to generate for its investors - it attempts to measure the total net assets a company is expected to build in the future. It is considered the true value of the company from an investment standpoint and is calculated by taking the present value of the earnings (attributable to investors) that a company is expected to generate in the future, along with the future sale value of the company. The idea behind this measure is that the purchase of a stock entitles the owner to his or her share of the company's future earnings. If all of the future earnings are accurately known along with the final sale price, the company's true value can be calculated.

For example, if we assume that a company will be around for one year and generate \$1,000 before being sold for \$10,000, we can find the intrinsic value of the company. At the end of the year we will have received \$11,000. If our required rate of return is 10%, then the present value today of the future earnings and sale price is \$10,000. If we were to pay more than \$10,000 for the company, our required rate of return would not be met.

To learn more, check out Value By The Book, A Guide to Stock Picking Strategies and the Ratio Analysis Tutorial.

RELATED FAQS
1. ### What is the difference between book value and market value

Learn the differences between book value and market value, and see how investors use each type to determine if a company ... Read Answer >>
2. ### What's the difference between book and market value?

Book value is the price paid for a particular asset. On the other hand, market value is the current price at which you can ... Read Answer >>
3. ### What is the difference between book value and carrying value

Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... Read Answer >>
4. ### What does it mean if a share's market value is significantly higher than its book ...

Learn how investors and analysts compare the market value of stock shares to the book value per common share; discover what ... Read Answer >>
5. ### What is the difference between intrinsic value and current market value?

Discover the differences between intrinsic and market values, what makes the former difficult to determine and how investor ... Read Answer >>
Related Articles
1. Investing

### Market Value Versus Book Value

Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
2. Investing

### Book Value: How Reliable Is It For Investors?

In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
3. Investing

### The Difference Between Book and Market Value

Book value is the price paid for an asset. It never changes as long as the asset is owned. Market value is the current price at which the asset can sell.
4. Investing

### What Is The Intrinsic Value Of A Stock?

Intrinsic value can be subjective and difficult to estimate. Itâ€™s a perception of a securityâ€™s value that factors tangible and intangible factors.
5. Investing

### What Is The Intrinsic Value Of A Stock?

Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.
6. Investing

### Understanding Book Value

Book value is a component in many ratios that investors use to evaluate stocks. Find out how it is calculated and what it reveals about a company.
7. Investing

### Understanding The P/B Ratio

A price to book ratio can tell an investor how the book value of a company measures up to its stock price. Find out how this ratio is calculated and how it can inform your investment decisions.
8. Investing

9. Investing

### Company Clone Cost Reveals True Value

Find out how calculating a reproduction cost for a company can beat out the dividend discount model.
RELATED TERMS
1. ### Book Value

1. The value at which an asset is carried on a balance sheet. ...
2. ### Book Value Per Common Share

Book value per common share is a measure used by owners of common ...
3. ### Return on Market Value of Equity - ROME

Return on market value of equity (ROME) is a comparative measure ...
4. ### Liquidation Value

The total worth of a company's physical assets when it goes out ...
5. ### Price to Tangible Book Value - PTBV

A valuation ratio expressing the price of a security compared ...
6. ### Book-To-Market Ratio

A ratio used to find the value of a company by comparing the ...
Hot Definitions
1. ### Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
2. ### Net Profit Margin

Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
3. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
4. ### Current Ratio

The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
5. ### SEC Form 13F

A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
6. ### Quantitative Easing

An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...