Saturday, September 09, 2006

Book Value or Net Asset Value

Book value means the current worth of the assets of the business. You may think of it in terms of a cake that is split into 10 portions/shares. Assuming the cake is worth $10. It means each piece is worth a dollar and thus its book value per share is a dollar.

By itself is quite meaningless, though it is a good enough gauge for a decision by you, to invest or not to, though it is not the best way. In essence, a dollar of asset in one business is different from a dollar of asset in another business in terms of earning power. For eg, a dollar of asset in ABC company can earns 20 cents of profit while a dollar of asset in XYZ can earns 15cents of profit. So in fact, the value of a dollar worth of asset is ABC is better cos it can generate more.

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