Monday, August 30, 2021

From time to time Calcbench likes to offer refreshers on basic financial reporting concepts and how to extract such data from our archives. Today let’s talk about book value.

Book value is one of the most basic, and important, concepts in financial analysis. You calculate it by subtracting a firm’s total liabilities from total assets. The difference is the firm’s book value, also commonly known as stockholder’s equity — because that difference is literally the equity that shareholders have in a firm, after netting out all those assets and liabilities.

When assets are greater than liabilities, book value is positive; that’s a good thing. When assets are less than liabilities, book value is negative. This is a bad thing because it means shareholders’ stake in the company has no value; the business owes more (in liabilities) than it possesses (in assets).

As we mentioned, you can calculate book value manually by subtracting liabilities from assets. Calcbench, however, also does this calculation for you automatically in our Multi-Company page. Just enter “stockholder’s equity” in the standardized metrics field on the left side of your screen, and we’ll return that number to you for whatever companies you’re researching.

Figure 1, below, shows the results for a few large companies we selected at random.

We included assets and liabilities along with stockholder’s equity only to demonstrate the math. You could just as well as search for stockholder’s equity alone and you’d get the same numbers you see above; or search for assets and liabilities and then work out the math yourself with a pencil. The results would be the same.

This also explains why we like to talk about goodwill and intangible assets so much — because an impairment to those assets will cut the size of total assets, and therefore lowers book value. In extreme cases, impairment could leave a firm with negative book value, which is disastrous.

Yes, we understand that other assets can be impaired too, such as an electric utility impairing the value of an expensive power plant it no longer uses. Any impairment can harm book value. But considering how goodwill keeps accumulating on the balance sheet, and how some firms have a majority of their total assets wrapped up in goodwill, that’s the impairment risk we watch most closely around here.

Anyway, if you want to find book value/stockholder equity, Calcbench provides it for any firm you’re researching with just a few keystrokes. That’s all there is to it.

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