Why are stocks valued differently?

Book value: key figure for valuing stocks

The book value provides both shareholders and companies with important information about the value of a company.

Legal basis

The book value is an important benchmark in commercial law when valuing companies on the balance sheet. However, there is no legal definition for the book value. Rather, it is used as a known quantity in various sections of the Commercial Code.

The book value does not apply in tax law. Here the fair value or the partial value as well as the common value of a thing play a role for taxation.

So-called "book value clauses" often play a role in the case of company acquisitions or the payment of shareholders. Accordingly, the book value of a company determines the amount of the severance payment for a partner.

In practice, such a clause tends to be disadvantageous for shareholders who have left the company, as the book value often deviates from the actual market or fair value of the company. In addition, it does not say anything about the actual substance of the company and is only one of many criteria.

Relevance in stock trading

Shareholders often look at the so-called price-to-book value ratio (P / B). It is determined based on the following formula.

KBV = price of a share / book value of a share

In this case, the book value of a company plays a role in relation to the securities issued. However, the price-to-book ratio is not always a reliable measure.

Because the book value of a company does not always have to match its actual value. The book value of a stock corporation may seem high at first glance.

However, the company's real value may have decreased due to a deterioration in its reputation. The KBV becomes even more unreliable if the share price is higher than expected.

Book value of a share

The book value of a share is expressed using the price-book value ratio.

  • Shares below book value: Shares below book value are securities with a very low P / B ratio. The company therefore has a higher book value in relation to the share price. In other words: the shares are cheap and do not correspond to the book value. In this case the P / B is below the value of 1. Then the substance of the company is higher than the price that investors pay for it on the stock exchange. For shareholders, these shares are generally regarded as a buy signal.
  • Shares above book value: If the shares are above the book value of the company, the price is higher than the equity.

In practice, investors should not rely solely on the price-to-book ratio of stocks. So the shares of a company can be sold below book value.

However, not all of the criteria for the assessment have been exhausted. It is possible, for example, that not all assets have been listed on the company's balance sheet.

It is also conceivable that not all liabilities have been taken into account. In this way, a low P / B can reflect the actual fall in value of the company. Such a security is then useless for investors.

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calculation

Book value in stock trading and accounting is determined in different ways. While the calculation for stocks is very simple, a more complex calculation has to be made for the balance sheet.

For stocks: Simplest calculation

The book value of a stock is very easy to determine. In this case, the equity of the share is divided by the number of shares.

example

If a company has an equity value of 1,000,000 euros and has issued 1,000 shares, the book value per share is 1,000 euros.

In the balance sheet or company valuation

To determine the book value in accounting, acquisition costs and production costs are added to the write-ups. The depreciation is then subtracted.

The simple formula for this is:

Book value = acquisition / production costs + write-ups - depreciation

If the depreciation corresponds to the actual performance, the fair value can be the same as the book value.

The so-called “book value method” is used to record the book value more precisely and also to take the impairment into account.

The book value method is also used to create a depreciation plan.

Depreciation is determined by offsetting the respective book value with a constant book value multiplier.

For company valuations, it is often not just the book value that is used, but the book value multiplier. It results from the company value divided by the book value. However, the multiplier is not used as an exact calculation variable, but rather used to estimate a company value.

Book gain and book loss

A book value is shown on a balance sheet until assets have been sold or liabilities have been settled through debt settlement. If provisions are used, their book value is also deleted from the balance sheet.

Until the book value is no longer listed in the balance sheet, the balance sheet items are valued on the respective key dates for the balance sheet. In this case, the term “continued book value” is also used.

If the book value on the balance sheet date is below the original value, it is a book loss. If the book value is higher, it is referred to as book profit.

Book value in company valuation

The book value of a company or group usually describes the value that falls on the company owner in the form of equity. The value is reduced by liabilities or special items. It is also possible to deduct intangible assets.

Nowadays, the intrinsic value is usually used for the actual assessment. He takes into account market prices. It is the price a company would get if it sold its assets and possessions.

From the point of view of shareholders, the ratio of book value to share plays an important role in company valuation. You can value the company by its share book value and thus know how much equity is falling per share.

If a company makes high profits with rising prices and still has a low book value, the share-to-book value ratio increases as a result.

Difference to the fair value

In accounting, the fair value describes the market value of a property on the balance sheet date. It can be equal to the book value if, for example, depreciation corresponds to the actual value development.

If depreciation is set too high, the book value is below the fair value. If depreciation is set too low, the book value is higher than the fair value.

Close link to depreciation

The book value is closely related to depreciation. This is the value of a thing minus the annual depreciation. If the fair value exceeds the book value, it is advisable to leave the item on the balance sheet.

Because as soon as it is withdrawn from the company's assets, the "profit" from this withdrawal must be listed and therefore taxed.