The Importance of Book Value Friday, September 30, 2:33 PM ET
It's one of the most straightforward ways to get a handle of a company's value: add up the carrying value of its assets, and subtract its liabilities... you're left with the book value. Compare that to the value the stock market is giving to the business, and you could discover an interesting opportunity. Naturally there are many other things to consider, like the nature of the assets and liabilities, whether the company is currently making profits or losses, and the ratio of its liabilities to its equity. For example, a company with illiquid assets, under a heavy debt burden facing upcoming debt maturities and finding itself unable to refinance, may have to sell off assets at a bad time for less money than it thought those assets were worth.
But value investors tend to find book value a good starting point to investigating a company, especially if the per-share stock price crosses below that company's book value. Perhaps the most prominent value investor around is Warren Buffett. Buffett's historic 2011 announcement of a share repurchase program for shares of Berkshire Hathaway (NYSE:BRK.A) serves to illustrate the importance of looking at book value. Buffett set a specific price-to-book-value target for the buybacks, saying Berkshire would buy back its own shares but only at prices up to a 10% premium over the then-current book value of Berkshire shares. If the opportunity arose for Berkshire to be able to buy back shares below its book value, some cash would be used up, thereby reducing assets, but each remaining shareholder would represent a slightly greater ownership percentage of the company ñ and the intrinsic value of the remaining shares would climb. One example of a company that actually did make large repurchases of shares substantially below book value in 2011 is American Capital (NASDAQ:ACAS), which announced it bought back millions of shares of its own stock, at prices considerably below its most recent reported book value per share, thereby elevating the per-share book value of the remaining shares.
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