What Is the Adjusted Book Value?

Adjusted book value is the measure of a company's valuation after liabilities, including off-balance sheet liabilities, and assets are adjusted to reflect true fair market value. The potential downside of using an adjusted book value is that a business could be worth more than its stated assets and liabilities because it fails to value intangible assets, account for discounts, or factor in contingent liabilities. It is 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.

Adjusted Book Value Explained

There are several methods an investor can use to assign value or price to a business. Deciding which form of valuation method to use involves several factors such as the firm type and availability of information. 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.

The Mechanics of Calculating Adjusted Book Value

Adjusting the book value of a firm entails line by line analysis. Some are straightforward such as cash and short-term debt. Such items are already carried at the fair market value on the balance sheet. The value of receivables may have to be adjusted, depending on the age of the receivables. For example, receivables that are 180 days past due (and likely doubtful) will get a haircut in value compared to receivables under 30 days. Inventory can be subject to adjustment, depending on the inventory accounting method. If a firm employs the LIFO method, the LIFO reserve must be added back.

Property, plant and equipment (PP&E) is subject to large adjustments, particularly the land value, which is held on the balance sheet at historical cost. The value of the land would likely be far greater than the historical cost in most cases. Estimates for what buildings and equipment would fetch in the open market must be made. The adjustment process becomes more complicated with things like intangible assets, contingent liabilities, deferred taxes assets or liabilities, and off-balance sheet items. Also, minority interests, if present, will call for more adjustments to book value. The goal is to mark each asset and liability to fair market value. After the values of all the assets and liabilities are adjusted, the analyst must simply deduct the liabilities from the assets to derive the fair value of the firm.