Q&A_ What is a book value?Namaste!
In this article, I am sharing my understanding of the following subjects. Please correct me if I am wrong in any of the mentioned things.
1. Book value is a value of total assets over total liabilities. Means, Total Assets - Total Liabilities.
2. Meaning, the amount available to the shareholders (per share) whenever the company goes into liquidation.
3. Book value highly depends on the nature of business. For banking companies, it is higher because they treat their given loans as assets. Whereas, for IT companies it is very low because their business doesn't require much of the assets like Plant & Machinery (they're not a manufacturing company), etc. They have a lot of employees as their assets, but by definition, employees are not assets since companies do not have control over them.
4. Book value increases/decreases overtime because of the following factors:-
a. Asset value decreasing factors: Depreciation (plant and machinery, etc), so as the Cap-Ex (Capital Expenditure). You know, this is a substantial expense, especially for the telecom companies and manufacturing companies, etc. This is not the case for IT companies.
For banking companies, increasing NPAs (non-performing assets). Decreasing market price of assets (for e.g. companies that have an intangible asset like "Patents", they are in demand now but soon the technology becomes old and priceless). "Goodwill", goodwill increase or decrease, totally depends on how the acquirer company values and calculates it.
b. Liability increasing factors: Loan interest payments (because our total liabilities increase). New loans and provisions, lawsuits (contingent liabilities), etc.
5. So, when the company goes bankrupt, your stock price doesn’t actually become zero. Because, you will be getting something in return due to a book value per share. After secured creditors, debentures, preference shareholders.
Fun-fact: Reliance Power shares are still publicly traded because it didn’t liquidate till now. It has a book value of Rs 36.1 per share, mostly coming from assets like land (Rs 5,887 crore), Plant and Machinery (Rs 37,137 crore), etc.
6. The share price is still falling, one reason is that the interest burden is still increasing YoY. Some banks have written it as a NPA, some are still trying to restructure.
